{"id":182659,"date":"2023-08-18T04:44:07","date_gmt":"2023-08-18T03:44:07","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=182659"},"modified":"2026-03-30T06:16:40","modified_gmt":"2026-03-30T05:16:40","slug":"difference-loan-loan-note","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/difference-loan-loan-note\/","title":{"rendered":"What is the Difference Between Loan Notes and a Loan?"},"content":{"rendered":"\n<p>Startups seeking growth financing can choose between loans and loan notes, both of which are forms of debt financing. Loans involve borrowing from a single lender, such as a bank, whilst loan notes work like shares issued to multiple investors but carry regular interest payments. This article will explain the difference between loan notes and a loan.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is a Loan?&nbsp;<\/h2>\n\n\n\n<p>A loan typically describes any arrangement between a borrower and a lender. The terms of the loan exist in the loan agreement. For smaller borrowing amounts, loans are usually between the borrower (your startup) and a lender, usually a bank. However, specific \u201cprivate credit\u201d investors may also provide loans to startups.&nbsp;<\/p>\n\n\n\n<p>Loans take a variety of forms. Below are three common examples:<\/p>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\"><table><tbody><tr><td><strong>Type of Loan<\/strong><\/td><td><strong>Explanation<\/strong><\/td><\/tr><tr><td><strong>Bilateral Term Loan&nbsp;<\/strong><\/td><td>YouCo Ltd borrows \u00a3500,000 under a bilateral term loan from BankCo plc. YouCo pays 6% interest on the loan twice a year to BankCo, which is two payments of \u00a315,000.&nbsp;<br>The \u201cterm\u201d of the loan is for five years. At the end of the period, YouCo must either pay back the entire amount at once or refinance the loan with BankCo or another lender.<br><br>More complex term loans may have different \u201ctranches\u201d with different interest rates. For instance, YouCo might enter into a term loan with BankCo for \u00a310m. It can \u201cdraw down\u201d the loan under three tranches, each with its interest rates. For example, tranche 1 would apply a 4% interest rate to a loan amount upwards of \u00a32m, whereas tranche 2 would apply a 6% interest rate to a loan amount between \u00a32m-\u00a35m.<\/td><\/tr><tr><td><strong>Revolving Credit Facility&nbsp;<\/strong><\/td><td>A revolving credit facility (RCF) allows startups to draw down and repay funds within the credit limit. Interest is charged on the outstanding balance, and minimum payments are required each billing cycle. RCFs have a revolving nature, replenishing available credit as funds are repaid.&nbsp;<\/td><\/tr><tr><td><strong>Overdraft Agreement<\/strong><\/td><td>YouCo can borrow against its current account up to a predetermined limit. It usually pays a high-interest rate calculated daily. This makes it suitable for short-term borrowing. Overdrafts can <a href=\"https:\/\/legalvision.co.uk\/startup\/invoice-discounting-improve-cash-flow\/\">help startups manage their cash flow<\/a>.&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\">What Are Secured Loans?<\/h3>\n\n\n\n<p>Most but not all loans are secured forms of lending. This means the lender takes security over the borrower\u2019s assets, usually through fixed and floating charges. Fixed charges are attached to the business\u2019s permanent assets, like:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>property;<\/li>\n\n\n\n<li>machinery; and&nbsp;<\/li>\n\n\n\n<li><a href=\"https:\/\/legalvision.co.uk\/intellectual-property\/monetising-intellectual-property-rights\/\">intellectual property<\/a>.&nbsp;<\/li>\n<\/ul>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>Fixed charges prevent the borrower from disposing of these assets without the lender\u2019s consent. It also requires the startup to maintain and insure the assets.<\/p>\n<\/div>\n\n\n\n<p>On the other hand, floating charges attach to current assets like:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>bank accounts;<\/li>\n\n\n\n<li>trade receivables; and&nbsp;<\/li>\n\n\n\n<li>inventory.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>The nature of floating charges usually allows borrowers to deal with these assets, which they would not be able to under a fixed charge. For instance, a floating charge allows the borrower to sell its inventory. However, a fixed charge prevents this.&nbsp;<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>If a lender enforces its floating charge over the borrower\u2019s assets, the floating charge converts to a fixed charge. This happens when the borrower defaults on the loan.<\/p>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">What Are Loan Notes?&nbsp;<\/h2>\n\n\n\n<p>Loan notes operate differently from loans but are a form of debt financing. A simple loan note transaction might look like this:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>YouCo approaches a lead investor, GrowCo LLP, looking to secure growth financing. YouCo needs \u00a35m of financing. GrowCo LLP is prepared to invest \u00a32.5m of financing in YouCo and will help YouCo source the remaining \u00a32.5m from GrowthCo\u2019s investor network.&nbsp;<\/li>\n\n\n\n<li>GrowCo finds five other investors, each prepared to invest \u00a3500,000 in YouCo.<\/li>\n\n\n\n<li>YouCo issues each investor one loan note for every \u00a35,000 invested in YouCo. This means GrowCo gets 500 loan notes, and every other investor gets 100 loan notes.&nbsp;<\/li>\n\n\n\n<li>Each loan note entitles the investors to a pro-rata interest share under the loan note issuance. This is:<\/li>\n<\/ol>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\"><table><tbody><tr><td><strong>Total Interest Owed under Loan Note Programme (per annum)<\/strong><\/td><td>\u00a3250,000 (\u00a35m x 5%)<\/td><\/tr><tr><td><strong>GrowCo<\/strong><\/td><td>\u00a3125,000 (\u00a32.5m x 5%)<\/td><\/tr><tr><td><strong>Each of the other five investors<\/strong><\/td><td>\u00a325,000 (\u00a3500,000 x 5%)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<ol start=\"5\" class=\"wp-block-list\">\n<li>The loan notes mature in five years. This means YouCo must pay each investor back the entire \u00a35m according to their share of loan notes.&nbsp;<\/li>\n\n\n\n<li>The noteholders are free to sell their notes to one another or third parties during the life of the loan note programme.&nbsp;<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\">What Are Convertible Loan Notes?&nbsp;<\/h3>\n\n\n\n<p>In the context of startup financing, it is common for loan notes to have a <a href=\"https:\/\/legalvision.co.uk\/corporations\/convertible-notes-convert\/\">convertible option<\/a>. This entitles the loan noteholder to convert some or all of the loan amount to ordinary shares in the startup. This benefits the startup because if the price at which the loans convert is competitive and noteholders exercise their conversion rights, the loan amount balance is written off. This means the startup does not have to repay this amount in cash.&nbsp;<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>Nevertheless, a potential downside for startups is that the conversion dilutes existing shareholders&#8217; shares.<\/p>\n<\/div>\n\n\n\n<p>Investors like convertible options because they can participate in successful startup profits. At the same time, if the startup does not meet its growth targets, investors maintain the protections the law affords creditors by not converting the loan notes.&nbsp;<\/p>\n\n\n\n<p>Convertible loan notes typically offer investors lower interest rates than non-convertible notes. This is because investors benefit from the future opportunity to become company shareholders.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What is the Difference Between Secured and Unsecured Loan Notes?&nbsp;<\/h3>\n\n\n\n<p>Some loan notes may be secured. This may be fixed and floating charge. However, if a startup has an existing secured loan, it rarely makes sense to issue secured loan notes on top of the existing debt. This is because the loan will be secured against the startup\u2019s assets.&nbsp;<\/p>\n\n\n\n<p>The benefit of secured loan notes is that they usually offer a lower interest rate than top unsecured notes. This reflects that secured noteholders are in a better position if the startup cannot repay the loan.&nbsp;<\/p>\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/4\/2022\/09\/06164254\/uk-startup-manual-290x410-1.jpg\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">UK Startup Manual<\/div>\n            <div class=\"body-text\">\n                <p>LegalVision&#8217;s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.uk\/uk-startup-manual.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n<div  class=\"box box--icon box--info\">\n    <h3 data-start=\"196\" data-end=\"241\">Key Statistics on UK Loan Notes and Loans<\/h3>\n<ul data-start=\"243\" data-end=\"894\">\n<li data-start=\"243\" data-end=\"445\">\n<p data-start=\"245\" data-end=\"445\"><strong data-start=\"245\" data-end=\"261\">\u00a3528 billion<\/strong>: The <a href=\"https:\/\/www.bankofengland.co.uk\/statistics?utm_source\">total value of business loans<\/a> in the UK reached \u00a3528 billion in 2024, up from \u00a3516 billion in 2023, indicating a steady lending environment.<span class=\"\" data-state=\"closed\"><span class=\"ms-1 inline-flex max-w-full items-center relative top-[-0.094rem] animate-[show_150ms_ease-in]\" data-testid=\"webpage-citation-pill\"><br \/>\n<\/span><\/span><\/p>\n<\/li>\n<li data-start=\"447\" data-end=\"683\">\n<p data-start=\"449\" data-end=\"683\"><strong data-start=\"449\" data-end=\"465\">\u00a35.9 billion<\/strong>: The <a href=\"https:\/\/www.bankofengland.co.uk\/statistics?utm_source=chatgpt.com\">combined loan book size<\/a> disclosed by respondents in the 2024 UK bridging market survey amounted to approximately \u00a35.9 billion, with an average loan book size of \u00a3210 million.<\/p>\n<\/li>\n<li data-start=\"685\" data-end=\"894\">\n<p data-start=\"687\" data-end=\"894\"><strong data-start=\"687\" data-end=\"698\">\u00a365,619<\/strong>: In 2023, the average <a href=\"https:\/\/www.bankofengland.co.uk\/statistics?utm_source=chatgpt.com\">total debt per household in the UK<\/a>, including mortgages, was \u00a365,619, highlighting the significant role of loans in personal finance.<span class=\"\" data-state=\"closed\"><span class=\"ms-1 inline-flex max-w-full items-center relative top-[-0.094rem] animate-[show_150ms_ease-in]\" data-testid=\"webpage-citation-pill\"><br \/>\n<\/span><\/span><\/p>\n<\/li>\n<\/ul>\n<p data-start=\"901\" data-end=\"913\"><strong data-start=\"901\" data-end=\"913\">Sources:<\/strong><\/p>\n<ol data-start=\"915\" data-end=\"1126\">\n<li data-start=\"915\" data-end=\"1010\">\n<p data-start=\"918\" data-end=\"1010\">Bank of England, &#8220;Monetary Financial Institutions\u2019 Loans to Non-Financial Businesses,&#8221; 2024.<\/p>\n<\/li>\n<li data-start=\"1012\" data-end=\"1068\">\n<p data-start=\"1015\" data-end=\"1068\">Bank of England, &#8220;Bridging Market Survey 2024,&#8221; 2024.<\/p>\n<\/li>\n<li data-start=\"1070\" data-end=\"1126\">\n<p data-start=\"1073\" data-end=\"1126\">Bank of England, &#8220;Money and Credit &#8211; May 2023,&#8221; 2023.<\/p>\n<\/li>\n<\/ol>\n<\/div>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i 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For startups, loans are typically borrowing arrangements between a startup and a single bank lender. In contrast, loan notes function like shares issued to multiple investors but are structured like any debt arrangement, with interest payments throughout its life.&nbsp;<\/p>\n\n\n\n<p>If you need help with your startup, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced <a href=\"https:\/\/legalvision.com.au\/startup-lawyer\/\">startup lawyers<\/a> help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision\u2019s legal membership, call <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or <a href=\"https:\/\/legalvision.co.uk\/membership\/\" target=\"_blank\" rel=\"noreferrer noopener\">visit our membership page<\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Frequently Asked Questions<\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1774847585145\"><strong class=\"schema-faq-question\">Can startups issue both loans and loan notes simultaneously?<\/strong> <p class=\"schema-faq-answer\">Yes, startups can hold both, but issuing secured loan notes alongside an existing secured loan rarely makes sense, as the startup&#8217;s assets are likely already charged to the existing lender.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1774847621371\"><strong class=\"schema-faq-question\">Do convertible loan note holders receive lower interest rates?<\/strong> <p class=\"schema-faq-answer\">Yes, convertible loan notes typically carry lower interest rates because investors gain the future opportunity to become shareholders and participate in the startup&#8217;s growth profits.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1774847627856\"><strong class=\"schema-faq-question\">Can loan noteholders sell their notes to third parties?<\/strong> <p class=\"schema-faq-answer\">Yes, noteholders can freely sell their loan notes to other noteholders or third parties during the life of the loan note programme, giving investors greater flexibility compared to traditional loans.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1774847633888\"><strong class=\"schema-faq-question\">What happens when loan notes mature?<\/strong> <p class=\"schema-faq-answer\">When loan notes mature, the startup must repay each investor their full principal amount according to their proportionate share of loan notes issued under the programme.<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div 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<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Startups seeking growth financing can choose between loans and loan notes, both of which are forms of debt financing. Loans involve borrowing from a single lender, such as a bank, whilst loan notes work like shares issued to multiple investors but carry regular interest payments. This article will explain the difference between loan notes and<a href=\"https:\/\/legalvision.co.uk\/startups\/difference-loan-loan-note\/\">Continue reading <span class=\"sr-only\">&#8220;What is the Difference Between Loan Notes and a Loan?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13522,"featured_media":3190,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"2256,173846,181959,2780,182196,175176","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[31],"tags":[180,646,916,1413],"class_list":["post-182659","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-startups","tag-debt-financing","tag-startup-capital","tag-loan","tag-startup-financing"],"acf":[],"yoast_head":"<!-- This site is optimized with the 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