Loan Notes Explained (2024)

FAQs

What is loan note explanation? ›

Loan notes are a financial instrument which detail when a loan must be repaid by the borrower and what interest is payable to the lender. Loan notes are often used as a way of investing in a company or property transaction. They can be secured against assets or unsecured.

A loan note instrument constituting floating rate, guaranteed loan notes for issue by a buyer to the seller(s) in connection with the acquisition of the entire issued share capital of a private limited company.

Therefore, we can work out the value that the market would place on these loan notes by looking at the present value of all the payments, discounted at the market rate of interest.

A loan note is a form of debt instrument issued by the debtor (known as the issuer) which entitles the noteholder (the lender) to principal and interest on the agreed sum.

Benefits of Loan Notes

When loan notes are used between businesses, the purchaser is able to act as a borrower and make payments over time, often at a minimal interest rate. Loan notes can be fairly simple to draw up and convenient for both parties to implement with straightforward details.

How loan notes are secured will depend on the transaction they relate to so the nature of security taken to secure obligations under loan notes will vary from transaction to transaction. Security may be taken over all the assets of the issuer or only over certain key assets.

It is an agreement between a company and an investor whereby the investor agrees to make a loan to a company, and the company agrees to repay the loan by an agreed date, usually with interest added on. Payees are often provided in lieu of cash, at the request of the payee.

The terms 'Bonds' and 'notes' are used interchangeably (and there is no legal difference between the terms), though notes tend to be issued either continuously or intermittently with shorter maturities (under three years) and bonds issued in a discrete large offering with a longer Maturity.

The tax treatment of loan notes depends upon whether they are structured as qualifying corporate bonds (QCBs) or non-qualifying corporate bonds (non-QCBs). QCBs are exempt assets for capital gains tax purposes which means that the gains arising on sale are not taxable and losses are not allowable.

What is the redemption of a loan note? ›

“Redemption” means repayment of a loan note – in other words, when the issuer pays all outstanding principal and interest, and the loan note is cancelled. A “convertible” loan note is one that can be exchanged for shares in the capital of the issuer.

An unsecured note is not backed by any collateral and thus presents more risk to lenders. Due to the higher risk involved, these notes' interest rates are higher than with secured notes. In contrast, a secured note is a loan backed by the borrower's assets, such as a mortgage or auto loan.

A promissory note is a legal, financial tool declared by a party, promising another party to pay the debt on a particular day. It is a written agreement signed by drawer with a promise to pay the money on a specific date or whenever demanded.

A loan term is defined as the length of the loan, or the length of time it takes for a loan to be paid off completely when the borrower is making regularly scheduled payments. These loans can either be short-term or long-term, and the time it takes to pay off debt from the loan can be referred to as that loan's term.

The mortgage promissory note includes the borrower's “promise to pay” the loan. It also lists the consequences should the borrower pay late or miss a payment, along with: Amount you're borrowing. Interest rate (if an adjustable-rate mortgage, this is the introductory rate)