What is a loan note?

It's a contract for a loan stipulating when the loan must be repaid, and usually also the interest that's payable. It can also contain additional provisions such as convertibility into equity or other types of debt - in which case it's called a convertible loan note.

Where have you heard about loan notes?

Loan notes are one of the most frequently used instruments in financing business start-ups, so you'll probably be familiar with them if you're an entrepreneur - and certainly if you're a lender.

What you need to know about loan notes...

Loan notes are considered to be legally binding agreements, with both parties committed to the terms as they're written. Loan notes can be drawn up by either party, though they're usually completed by the lender.

Essentially they're a form of deferred payment, and in the UK their tax treatment is as either 'qualifying corporate bonds', which offer a tax shield, or as 'non-qualifying corporate bonds'.

Loan notes are mainly used for instalment debts, where the borrower purchases a product or service and pays the amount back over time.