Loan notes are one of the most common ways for private companies to raise capital directly from investors, and one of the most frequently misunderstood. For IFAs and wealth managers weighing up whether they belong in a client portfolio, the quality of your due diligence matters far more than the headline coupon.
This guide sets out how loan notes work, what to check in the documentation, the risks to put in front of clients and where they can sit within a suitability-led recommendation.
What Is a Loan Note?
A loan note is a legal instrument recording a loan from an investor to a company. The issuer agrees to pay interest at a set rate over a fixed term and to repay capital at the end of that term.
Unlike shares, a loan note gives the client no ownership of the issuer. The return is defined by the terms of the note, not by how well the business performs. Typical issuers include property developers, renewable energy projects, growing trading businesses and specialist lenders.
Typical Terms
Terms vary from issue to issue, but most notes share a familiar structure:
- Term: usually between one and five years
- Coupon: a fixed annual rate, generally above cash or gilts to reflect the additional risk
- Payment frequency: monthly, quarterly, annually or rolled up to maturity
- Repayment: capital returned at maturity, sometimes with early redemption at the issuer’s option
- Minimum investment: often pitched at certified high net worth or sophisticated investors
Because these are private arrangements, the information memorandum and the loan note instrument need to be read in full, not just the brochure.
Secured vs Unsecured Notes
Secured notes are backed by specific assets such as property, equipment or subsidiary shares, usually enforced by a security trustee on behalf of noteholders. Security improves the creditor position, but recovery still depends on asset value and enforcement costs.
Unsecured notes rely only on the issuer’s promise to pay. In an insolvency, unsecured holders rank behind secured creditors and may recover little or nothing.
Advisers should also establish where the notes rank against other debt in the structure, and whether an independent security trustee is appointed.
The Risks to Document
- Default risk: interest may stop and capital may be lost if the issuer cannot meet its obligations
- Liquidity risk: there is usually no secondary market, so clients should expect to hold to maturity
- Concentration risk: many issuers are a single business or project
- Limited protection: loan notes are generally not covered by the Financial Services Compensation Scheme (FSCS)
- Information risk: private issuers disclose less than listed companies, which raises the bar for due diligence
A coupon that looks too good to be true deserves extra scrutiny. Higher headline rates almost always reflect higher risk.
Due Diligence Checklist for Advisers
- The issuer’s track record and financial position, including audited accounts where available
- How the funds will be used and where the cash to repay investors will come from
- The security package: what is charged, how it has been valued and by whom
- The security trustee’s role and how enforcement would work in practice
- Early redemption, extension and default clauses in the instrument
- Who the offer may lawfully be promoted to, since many notes are restricted to certified high net worth or sophisticated investors
Suitability and Portfolio Fit
For the right client, loan notes can provide fixed income with a defined term and returns less tied to daily market movements. They are best treated as a satellite holding rather than a core position.
Suitability, target market and Consumer Duty outcomes all need to be evidenced on file: the client’s capacity for loss, need for liquidity and time horizon should drive the allocation, with exposure spread across issuers, sectors and maturity dates to limit the impact of any single default.
Conclusion
Loan notes are a simple concept wrapped in terms that demand careful reading. Understanding security, ranking, liquidity and the issuer’s ability to repay is what separates a defensible recommendation from an expensive surprise for the client and the adviser.
If you are an IFA or wealth manager looking for loan note opportunities for your clients, see our Loan Notes page or speak to our team.
Professional audience only: This content is intended for IFAs, wealth managers and other professional intermediaries. Target Wealth Group is a B2B business and we do not deal with retail investors.
Risk warning: This article is for information only and does not constitute financial advice or an offer to invest. Many alternative investments are high risk and illiquid, are not covered by the Financial Services Compensation Scheme (FSCS), and you could lose some or all of the money you invest. Past performance is not a reliable indicator of future results. Please read our full risk warning and seek independent financial advice if you are unsure.
