What Do I Do With A Convertible Loan Note?

If you have been into the stock market, you might be familiar with the concept of buying stocks in the company then the profit earned by the company is debited to you as per the percentage of stock you possess. Many people wonder about how these stockholders convert into equity owners of the company. To understand this let us first amplify the term convertible loan note. When a company needs instant funds it often uses the convertible loan note. The interest rate of a convertible loan note is often less and is payable as compared to standard loans. It is a sort of hybrid form of money lending where the funders of an enterprise offer an interest-based repayable loan that further on the request of funders converts into equity giving the funders the ownership of the company’s share. 

Convertible Bond And Exchangeable Bond

When a credit holder or an investor lends company funds, under a convertible bond it gives the creditor the option of converting the convertible bond to newly issued shares. The shares issued are of the borrowing enterprise. The convertible bond forms the foundation of a convertible loan note which is a document stating the loan issued to the company which can further be interchanged with the company’s percentage ownership as the form of repayment. On the other hand, an Exchangeable bond enables the bondholder to exchange the credit amount with the company’s assets, be it a building, construction site, or anything that the company owns. 

Needs And Requirements For These Convertible Loans

A Company issues these convertible loans when it needs generally funding, instant cash is needed for the upcoming venture or acquisition purposes. Since convertible loan notes are interchangeable or I must say convertible in nature the borrower generally pays a lower interest rate as compared to general loans issued by the banks. It is a sort of raising funds by issuing shares to an investor, the ownership is further divided among the shareholders, and the decisions regarding the company greatly depend upon the opinions of the shareholders. If the loan note is converted into equity, the company is no longer bound to repay the issued loan amount to the investor. Top of all it is less paperwork and can be easily issued when compared to purchasing the company’s shares.

Now the next question that arises is when these convertible loan notes are converted into equity, Generally, when a company needs funding for the launch of its new product or new venture and the outside lenders are charging a high rate of interest, the company will convert the convertible loan notes of its investors as they will provide funding on a comparatively less rate of interest but in return of company’s shares. In short, the convertible loan note is one of the easiest ways to generate instant funding.