Before we move on to the types of convertible notes, we need to be clear about what these loans exactly are. To start with, convertible notes are basically a type of short-term debt that is made available by the investors to smaller businesses or start ups. Such types of loans or debts are generally meant to make available the funds needed by smaller businesses so that their operations and activities may carry on in an unobstructed manner.
Like all other types of loans, such types of loans are divisible into two major categories as explained below:-
Secured Loan Notes
This type of convertible loan note is basically meant to promise some assets of the borrowers to the lenders or the investors, in case they fail to pay back the loan amount. Since the lenders are assured of some assets in lieu of the loan amount in the absence of repayment of the same therefore there is some sort of security to the investors that they will at least get something in the form of compensation for the loan note offered by them. Loan notes become highly susceptible in some cases and that is why the investors look forward to the maximum level of financial protection they can get.
Unsecured Loan Notes
It is the second major type of convertible loan note that is available for borrowers. This type of loan note can be considered to be quite straightforward in nature. In such a type of loan note, the founders and the investors are directly related in the form of parties. The investors in this case are referred to as Loan Note Holders or simply Note Holders. This type of deal is chiefly comprised of some terms and conditions in an agreement that is signed under the given loan note by the borrowers. It means they agree to the terms of the investors and in turn, the investors provide them with the funds in cash. In contrast to secured loan notes, the borrowers have to pay back the entire loan amount to the investors. In case, they fail to do so then the borrowers have to issue shares to the investors to compensate for the loan amount. The investors are assured of only the shares in the company of the investors and nothing else.
This was all about the major types of loan notes that are available and accessible to you as a borrower. By being aware of the benefits associated with the specific type of loan notes, you may decide on the best suited option as per your needs. This in turn allows you to have access to the funds that your business or start up may need in order to carry on with its operations or activities.