A loan note is a type of

financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership, interest in an entity or a contractual right to receive or deliver in the form ...

; it is a

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

for a

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

that specifies when the loan must be repaid and usually also the interest payable. It is similar to a

promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financing instrument and a debt instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of ...

but the differences can be significant in terms of consequences, especially tax consequences. Chief of these is that by specifying the interest payable, the lender may obtain a tax shield. Loan notes are simple, but important instruments in business and finance. A loan note can also be conceived of as a form of deferred payment, and in the UK the tax treatment of loan notes is as either ‘qualifying corporate bonds’ (QCBs), which provide a tax shield, or as ‘non-qualifying corporate bonds’ (non-QCBs) Loan notes may contain other provisions such as convertibility into equity or other kinds of debt, in which case they are called "convertible loan notes". The loan note is one of the most widely used instruments in financing the entrepreneurial venture and in start-ups.

References

Banking terms Financial markets Legal documents Negotiable instrument law Securities (finance) Interest-bearing instruments Accounting source documents Loans {{Business-term-stub