When a company is set up, it requires a lot of financial back-ups. The company starts functioning with these loans and starts to repay these loans once the cash starts to flow in. Every loan has a repayment date, and the companies sometimes face issues in repaying the loans. In such cases, many companies prefer to convert the loan to convertible notes. Convertible loan notes are loans that are being converted to shares of the company. Instead of paying the loan, the company pays shares to the investors.
There are many advantages that both the company and the investors share from a convertible loan note. Some of them include:-
Benefits for company founders
The company founders and manager benefit a lot from these convertible notes. They have the power to set the terms and conditions associated with these notes. These rules will be the same for all the lenders associated with the company. Therefore, the company can set terms that can prove to be favorable to their cause.
Additionally, the terms and conditions associated with a convertible loan note are very simple. It does not involve many variables. Therefore, the calculations associated with it are easy. Because of its simplicity, it is easy to attract more willing investors.
Also, despite the company deciding to opt for convertible notes, they still have the option to repay the loans. If they wish not to dilute the founders’ list, they can use their profits to take care of the loan. This will also mean that the company profits are not distributed into more pockets.
Benefits for investors
Along with the company founders, the investors can also benefit from the convertible notes. They can negotiate the capital and the discount that applies to the conversion rates. They can even obtain the best parts of advantageous terms without even negotiating for it. They can also decide whether they want to charge any interest on the money that they have lent out. Obtaining the shares can also prove beneficial to the investors, especially if the company makes a huge profit in their business. The value of the share might even exceed the loan repayment amount by a large margin.
A convertible loan note has proved to be beneficial for both the company and the investors. If you wish to provide the same for your company, you can search for some willing investors who accept your terms and conditions.