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Exploring Loan Notes: A Purbeck Insurance Guide to Smart Borrowing

Posted by Todd Davison on

So you're ready to expand your business.

 

Whether that involves diversifying your product line, hiring new team members, or strengthening your brand presence through marketing campaigns and advertising, it's an exciting time for you as a business owner.

 

However, without the proper funding, taking action to implement those growth strategies can come to a grinding halt.

 

While traditional loans are an option, they can be restrictive, especially for SMEs looking to fund specific projects or growth initiatives. This is where loan notes come in – a flexible, often overlooked solution that can help you fuel your next big move.

 

In this blog, we explore how loan notes work and why they might be exactly what your business needs.

 

What is a loan note?

 

A loan note is a written agreement between a lender and a borrower. However, unlike a traditional bank loan, loan notes offer far more flexibility in how they are structured.

 

They outline key details like the amount borrowed, the interest rate, and the repayment terms, which can be tailored to suit the needs of both the lender and the borrower.

 

This makes them an attractive option for businesses looking to fund growth strategies without being weighed down by the rigid terms of a traditional loan.

 

 

What are the different types of loan notes?

 

Loan notes come in various forms, offering unique benefits depending on your business goals and financial needs, including:

 

Secured loan notes

 

Secured loans are insured using the borrower's assets, such as savings and property held within the business, as collateral. Whilst not the primary security, the lender may also request personal guarantees which means that if the borrower cannot meet their financial obligations, the lender has the right to seize the assets to recover the funds.

 

Unsecured loan notes

 

Unsecured loan notes are uncommon due to the absence of collateral within the business. Without collateral, this type of loan note raises the risk for the lender, as it means there is no assurance of debt repayment from the business in the event of a default and therefore personal guarantees can be a key requirement.

 

Convertible loan notes

 

These allow the loan to be converted into equity in the company at a later date, typically after a particular milestone is reached or at the lender's discretion. This is ideal for businesses seeking rapid, short-term funding.

 

Traded loan notes

 

Some use company stocks as collateral instead as an alternative to using physical assets or liquid funds to secure a loan. Should debts not be able to be paid, stocks will be sold to cover the costs.

 

What are the advantages of a loan note, and how might they be a better option than traditional loans?

 

When researching your funding options, it helps to weigh up the benefits of each. While both loan notes and simple loans provide the capital essential to business growth, loan notes can offer distinct advantages, especially for businesses looking for flexible and strategic funding. Here are some key benefits:

 

Flexible and customisable terms

 

One of the most significant advantages of loan notes is the level of flexibility they offer. Loan notes can be tailored to suit the specific needs of your business. From adjusting your interest rate or repayment schedule to incorporating special terms like conversion to equity, loan notes can be designed to align with your cash flow and growth strategy.

 

Rapid and seamless access to capital

 

Loan notes can be beneficial if you need to act quickly to seize a business opportunity, offering a quicker route to funding in comparison to other traditional funding options.

 

Cost-effective financing

 

Loan notes often have lower costs than other forms of financing as they can be negotiated with fewer administrative fees and may not require extensive legal documentation. Additionally, businesses can benefit from the cost savings of conversion options or interest payment terms.

 

How to protect your assets after securing a loan note

 

Securing a loan note often involves providing a personal guarantee, which can place your personal assets at risk if your business encounters financial difficulties. While loan notes offer flexibility and strategic funding, taking steps to protect your personal assets from potential liabilities is essential.

 

One of the most effective ways to protect your personal assets is through personal guarantee insurance.

 

PGI is a specialised type of policy designed to cover the financial risk if your business defaults on the loan, helping to cover the amount owed and safeguarding your assets.

 

Pursue business growth with confidence with Purbeck

 

Securing a loan note with a personal guarantee can expose your assets to significant risk, but it doesn't have to be that way.

 

At Purbeck, our personal guarantee insurance policies can be applied to new and existing loan agreements, covering up to 80% of the value of your assets, allowing you to focus on the growth of your business with peace of mind.

 

If you want to expand your business without the associated risks of a personal guarantee, don't hesitate to contact our team of experts today.

 

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