Loans are needed by different types and sizes of businesses at some point in time or the other in order to carry on with normal and most optimal business operations. Different types of loans are availed of by the businesses as per their needs to suffice their purposes well. In this respect, the concept of CLN or what is also referred to as convertible note is perhaps known to all who are related to the business world. Basically, it is a type of short term debt that business owners get from the concerned investors. Such types of loans get converted into equity at a later date. These types of loans are generally made available by the investors to start-ups or such business entities that are making efforts to get established in the business world. The investors are benefited as they have equity in the company or business being invested in.
It is worth mentioning that convertible note is majorly divisible into two vast categories as explained hereunder:-
Convertible Notes That Are Secured
Suggested by the name, this type of convertible loan note assures some sort of guarantee to the investors that they can recover their loan amount if the borrowers fail to repay the loan amount as per terms and conditions decided between the two parties. Generally, the borrowers have to promise some of their valuable assets to the investors that may compensate for the loan amount, in case they face a situation wherein they find it difficult to pay back the loan. The provision of such types of loan notes makes the investors secure about repayment of their loan in the form of assets, equity in the borrowers’ company or in some other form that may compensate for the loan amount. Hence chances of any losses are ruled out in this case.
Convertible Notes That Are Unsecured
Contrary to secured loan notes, the unsecured convertible loan note hardly offers any sort of security to the investors. It can be compared to normally borrowed loans wherein the investors and the borrowers get into an agreement in the form of two parties. The term Loan Note Holders is used to refer to the investors in this type of loan. There are some terms and conditions to which both the parties i.e. the investors and borrowers agree. Only after this agreement, the loan amount is made available by the investors to the borrowers. This type of loan note is regarded as unsecured as the investors can only get shares issued by the borrowing company in case they are unable to pay back the loan amount.
By now the concept of CLN and its major types has become clear. With such knowledge about this type of loan, the investors, as well as investees, get benefited in many ways.