Loan note

Definition

A loan note is a debt instrument recording a loan’s principal, interest rate and repayment terms. Investors and shareholders often lend via loan notes, which can be transferable and may rank as subordinated debt.

In plain terms

It is a formalised loan on paper, common when directors or investors put money in as debt rather than equity. A convertible version can later turn into shares.

Why it matters for your company

Loan notes structure investor funding cleanly and can be subordinated to bank debt via an intercreditor agreement, reassuring senior lenders. See convertible loan note.

In practice

Picture a UK limited company bringing in a director or an outside investor who wants their contribution treated as debt rather than equity. Instead of a handshake, the parties draw up a loan note: it records who has lent what, on what interest basis, and when repayment or conversion falls due. The company carries the loan note as a liability on its balance sheet, distinct from share capital, and the noteholder sits alongside (or behind) other creditors depending on how the note is drafted.

Where a company already has a business loan or a Creditcorp facility in place, a fresh loan note from a director or investor typically needs to be documented so it doesn't unintentionally rank ahead of that existing debt. That is usually handled through the kind of subordination wording described in an intercreditor agreement, which sets out the pecking order if things go wrong.

How lenders read it

When a lender reviews a company's accounts or ownership structure, a loan note tells them there is debt sitting behind the scenes that isn't share capital and isn't a bank facility — often money from directors or connected investors. Lenders will want to understand its terms: is it repayable on demand, is it subordinated, and could it be called in at an awkward moment. A properly subordinated loan note, clearly documented, is far easier for a senior lender to look past than an informal, undocumented director loan with no fixed terms.

Because loan notes can be transferable, a lender will also want clarity on who currently holds the note and whether a change of holder could change the company's obligations. Clear, well-drafted paperwork on this point tends to reassure a lender far more than the underlying amount involved.