Published 13 October 2026 | By FJP Investment Editorial Team

Loan notes appear frequently in private investment, corporate finance, property finance and business fundraising.

The basic concept is relatively simple.

A company owes money to an investor or creditor, and a loan note records the debt and the terms under which it is expected to be repaid.

HMRC describes a loan note as an instrument giving evidence of a loan, and also notes that the term can be used as another name for a bond.

But understanding that definition is only the beginning.

Loan notes can be secured or unsecured. They can have different maturity dates, payment structures, creditor rankings, transfer restrictions and default provisions. Some can be converted into shares. Others may be extremely difficult to sell before maturity.

Most importantly, the existence of a loan-note document does not guarantee that the issuer will ultimately have enough money to meet its obligations.

This guide explains what a loan note is, how a loan note works and some of the issues investors should understand when researching one.

Important: This article is provided for general educational purposes only. It does not constitute investment, legal or tax advice, an invitation or inducement to invest or a recommendation of any investment. Loan notes and other private investments can involve substantial risk, including illiquidity, issuer default and partial or total loss of capital.

What is a loan note?

A loan note is a debt instrument.

In broad terms, it records money or another debt owed by an issuer to the holder of the note and sets out the contractual terms applying to that debt.

HMRC’s Corporate Finance Manual defines a loan note as an:

“Instrument giving evidence of a loan or another name for a bond.”

HMRC also identifies loan notes, bonds and debentures as forms of financial instrument.

You can read HMRC’s corporate finance glossary for the technical terminology.

In a typical private-investment context, a company issues loan notes to investors in return for capital.

The company becomes the debtor or issuer.

The investor becomes a creditor or noteholder.

How does a loan note work?

A simplified transaction might work like this:

1. A company wants to raise debt capital.
2. It prepares the legal terms governing a loan-note issue.
3. An eligible investor decides whether to subscribe.
4. The investor provides the agreed capital to the appropriate recipient under the transaction documents.
5. The company issues the investor a loan note or records their holding under the relevant note instrument.
6. The issuer becomes contractually obliged to deal with interest, repayment and other rights according to the terms of the documents.
7. At maturity, the outstanding capital is due to be repaid unless the terms provide for something different or circumstances such as default, restructuring or an agreed extension intervene.

That is the contractual structure.

The commercial question is whether the company will actually be financially capable of performing those obligations.

A loan note is debt, not usually ownership

This is one of the most important distinctions.

A conventional loan-note investor is normally a creditor rather than a shareholder.

If you purchase ordinary shares in a company, you acquire an equity interest and participate in the ownership of the business.

If you provide money under an ordinary loan-note structure, the company instead owes you a debt according to the terms of the instrument.

The two positions can therefore have very different:

• rights;
• returns;
• voting arrangements;
• priority;
• risk;
• repayment expectations; and
• outcomes following insolvency.

There are exceptions.

Some loan notes can be convertible, meaning they contain rights or provisions allowing the debt to convert into equity under defined circumstances.

The actual documentation therefore matters more than the label.

What information does a loan-note instrument contain?

The exact documentation varies considerably between transactions.

Terms can address matters including:

• the legal issuer;
• nominal amount of the notes;
• subscription amount;
• interest or coupon arrangements;
• payment dates;
• maturity;
• repayment;
• security;
• events of default;
• investor voting;
• transferability;
• early redemption;
• issuer rights;
• noteholder rights;
• extensions or amendments;
• governing law; and
• enforcement.

Investors should therefore read the actual legal instrument rather than relying solely on a summary page or marketing presentation.

What is the maturity date?

The maturity date is broadly the date on which the relevant debt becomes due for repayment under the terms of the instrument.

A loan note might have a term measured in months or several years.

The important distinction is between:

contractual maturity

and

guaranteed receipt of money on that date.

They are not the same thing.

A contract can say that £100,000 is repayable on a particular date.

The issuer still needs £100,000 of available resources to make that payment.

If it does not, a default or restructuring process may follow.

How is interest paid on a loan note?

Loan-note terms can structure interest in different ways.

Depending on the instrument, interest might be:

• paid periodically;
• accrued and paid later;
• paid on redemption;
• fixed;
• floating or linked to a benchmark;
• capitalised in certain circumstances; or
• structured in another manner under the legal documents.

The fact that a rate is contractually fixed does not make payment guaranteed.

The issuer still bears the obligation to fund it.

Our guide to fixed-return investments explains why investors should look beyond a contractual coupon and examine the business producing the cash required to pay it.

Where does the money to pay investors come from?

This is ultimately more important than the wording printed beside the interest rate.

Depending on the issuer, payments might be expected to come from:

• operating cash flow;
• business profits;
• property sales;
• asset disposals;
• contractual revenues;
• refinancing;
• sale of the company; or
• another identified source.

An investor researching a loan note should try to understand that mechanism.

The question is not merely:

“What does the note say I should receive?”

It is:

“What economic activity will allow the issuer to meet the obligation?”

Why do companies issue loan notes?

Companies raise debt capital for many legitimate commercial reasons.

Capital might be needed to:

• expand a business;
• acquire property;
• finance construction;
• purchase another company;
• fund working capital;
• acquire equipment;
• refinance existing borrowing;
• finance a particular project; or
• support another corporate purpose.

Private debt can sometimes provide more flexibility than conventional bank financing.

But investors should still ask why the company has selected a particular funding route and whether the economics of the business support the resulting debt burden.

Loan notes can arise in circumstances other than a cash investment

Although private investors frequently encounter loan notes when lending capital to businesses, technically loan notes can also be issued to represent other debts.

HMRC gives the example of a company acquiring assets and satisfying part of the purchase price by issuing loan notes to the seller.

In that situation, no fresh cash has necessarily been lent at that point.

The loan note instead represents the debt owed to the creditor.

This illustrates why a loan note is best understood as a debt instrument rather than simply a certificate proving somebody transferred money.

What is a secured loan note?

A secured loan note is one where the debt benefits from a security arrangement over specified assets or rights.

Potential security could involve:

• property;
• land;
• company assets;
• shares;
• receivables;
• equipment;
• bank accounts;
• intellectual property; or
• another asset or security package.

Security can potentially improve a creditor’s recovery position if the issuer defaults.

But the word secured should never end the investigation.

Investors should establish:

• what asset is actually secured;
• who owns it;
• what it is worth;
• what other debt exists;
• where the noteholder ranks;
• who holds the security;
• whether the relevant legal charges are properly documented; and
• how enforcement would work.

Our detailed guide to asset-backed investments and security covers these questions in greater depth.

What is an unsecured loan note?

An unsecured loan note does not benefit from specified collateral in the same way as secured debt.

The investor instead relies primarily on the issuer’s general ability to meet its obligations.

If the company becomes insolvent, the noteholder’s recovery will depend on matters including:

• the company’s remaining assets;
• secured creditors;
• preferential claims;
• other unsecured liabilities;
• insolvency expenses; and
• the contractual ranking of the relevant debt.

Unsecured does not mean worthless.

Many perfectly legitimate companies issue unsecured debt.

But the absence of specific security is a material part of the credit risk and should be understood.

What is creditor ranking?

Not every creditor stands in the same position when a company fails.

A business may have:

• senior secured bank debt;
• other secured lenders;
• subordinated lenders;
• loan-note holders;
• trade creditors;
• tax liabilities; and
• shareholders.

Where a loan note sits within that structure can have a major effect on potential recovery.

An investor holding subordinated debt may have to wait until senior creditors have been dealt with before receiving anything.

This is one reason two loan notes issued by different companies — or even by the same group — can have very different risks.

What is a subordinated loan note?

Subordinated debt contractually ranks behind specified senior debt.

This can make the investment more exposed if the issuer becomes financially distressed.

The existence of subordination should normally be clearly understood from the transaction documents.

An investor should ask:

• Who ranks ahead?
• How much is owed to those creditors?
• What security do they hold?
• Can additional senior debt be incurred?
• When can the subordinated creditor take enforcement action?

What is a convertible loan note?

A convertible loan note combines debt characteristics with a potential future equity conversion.

Depending on its terms, the debt may convert into shares:

• at the investor’s option;
• automatically following a future fundraising;
• at maturity;
• following a specified event; or
• under another agreed mechanism.

Convertible notes are particularly common in some early-stage and growth-company financing arrangements.

The investor needs to understand both sides of the instrument:

the creditor position before conversion and the equity position afterwards.

Conversion can materially change rights, risk and potential recovery.

Can loan notes be transferred or sold?

Sometimes.

But investors should never assume they can exit simply because they own a financial instrument.

Some loan notes contain transfer rights.

Others restrict transfers unless the issuer consents or particular conditions are met.

And even if a note is legally transferable, there still has to be another person willing to buy it.

Many private loan notes have no established secondary market.

That can make them highly illiquid.

An investor considering a multi-year loan note should therefore understand whether there is any realistic means of accessing the capital before maturity.

Transferable does not mean liquid

This distinction is worth emphasising.

A contract may permit an investor to transfer their note.

That does not mean a market exists.

It is similar to owning an unusual property.

You may be legally entitled to sell it tomorrow.

You still need somebody willing to buy it at an acceptable price.

Private investments can therefore remain illiquid even where the legal documentation permits transfers.

What happens when a loan note matures?

If everything proceeds according to the original terms, the issuer makes the payments required under the note and repays the outstanding capital on redemption or maturity.

The debt is then discharged in accordance with the transaction documents.

But alternative outcomes can include:

• early redemption;
• conversion into shares;
• an agreed extension;
• refinancing;
• restructuring;
• partial repayment;
• default; or
• insolvency.

The legal documents should explain what rights exist if the original repayment does not occur.

Can a loan-note term be extended?

Potentially, depending on the documents and the consent mechanisms involved.

Some instruments may give the issuer particular extension rights.

Others may require approval from a specified proportion of noteholders.

In other situations, extension may require individual agreement.

An investor should therefore establish before subscribing:

• whether extension is permitted;
• who can approve it;
• how investor voting works;
• whether payment terms change; and
• what happens if the investor disagrees.

What is an event of default?

A loan-note instrument should normally identify circumstances that amount to default.

Depending on the documents, examples might include:

• failure to pay amounts when due;
• breach of material contractual obligations;
• insolvency;
• misrepresentation;
• failure to maintain required security;
• cross-default under other borrowing;
• unlawfulness; or
• other specified events.

The consequences can also vary.

They may include rights to accelerate repayment, enforce security, appoint relevant insolvency or enforcement professionals or exercise other contractual remedies.

The practical effectiveness of those rights depends on the financial circumstances of the issuer and the value available to creditors.

A legal right to repayment is not the same as the ability to recover

This is perhaps the single most important lesson when understanding debt.

If a company owes an investor £100,000 and defaults, the investor may have a perfectly valid legal claim for £100,000 plus whatever other amounts are contractually due.

But if the company has insufficient assets, the legal claim does not create the missing capital.

Recovery depends upon what value actually exists and what claims have priority over it.

Who holds security for loan-note investors?

Where numerous investors participate in a secured issue, it may be impractical for every individual investor to hold and enforce security separately.

A structure may therefore appoint a security trustee or another representative to hold the relevant security for the benefit of noteholders.

Investors should understand:

• who the trustee is;
• what it actually holds;
• what powers it has;
• how it receives investor instructions;
• what voting thresholds apply;
• when it can enforce; and
• how costs are dealt with.

The FCA has specifically warned consumers not to assume that references to an “FCA-authorised security trustee” mean the underlying loan-note investment has been approved or protected by the FCA.

Regulatory status needs to be considered separately for each activity and party.

Is a loan note the same thing as a bond?

The terminology can overlap.

HMRC itself notes that loan note can be another name for a bond.

In commercial practice, however, the word bond can cover everything from large publicly traded government or corporate securities to privately issued debt instruments.

A private loan note may differ substantially from a conventional bond traded in an established public market.

The important characteristics are therefore not the name alone but:

• issuer;
• legal structure;
• security;
• ranking;
• maturity;
• transferability;
• liquidity;
• regulatory position; and
• credit risk.

What is a mini-bond?

The phrase mini-bond is commonly used for certain forms of privately issued corporate debt.

The FCA frequently discusses mini-bonds and loan notes together because some speculative and illiquid securities sold to investors have used these structures.

But terminology is not perfectly standardised and not every instrument described as a loan note is necessarily identical to what the FCA or market participants may describe as a mini-bond.

Investors should therefore analyse the actual instrument rather than trying to assess risk solely from its name.

The FCA has recently warned again about unregulated loan notes

On 20 August 2026, the Financial Conduct Authority issued a fresh warning concerning unregulated loan notes and mini-bonds.

The FCA explains that a loan note or mini-bond will commonly involve lending money to a company for a set period in return for interest, and that investors therefore need to feel comfortable assessing the company’s ability to repay them.

It also warns that if the company fails, investors may recover substantially less than they invested or nothing at all.

You can read the FCA’s current warning on unregulated loan notes and mini-bonds.

Can loan notes be unregulated?

Yes.

Private debt can involve regulated and unregulated activities and structures.

Investors should not assume that the existence of:

• a UK company;
• English-law documentation;
• UK property security;
• a professional trustee;
• a solicitor;
• an accountant; or
• another regulated party

means that the underlying loan-note investment itself receives mainstream regulated investment protection.

The FCA permanently restricted the mass marketing of speculative illiquid securities, including certain loan-note and mini-bond investments, to ordinary retail investors from 2021.

Financial-promotion rules therefore matter considerably in this area.

Are loan notes protected by the FSCS?

Investors should check the specific investment rather than assume protection exists.

Many unregulated private and high-risk investments do not benefit from the Financial Services Compensation Scheme in the way mainstream regulated savings or investment products may.

Access to the Financial Ombudsman Service may also be unavailable in relation to an unregulated underlying investment.

The FCA’s guidance on high-risk investments explains that investors in many unregulated products can have substantially fewer regulatory protections.

Why are some loan-note promotions restricted?

Private loan notes can expose investors directly to the financial health of a single company.

They may also be:

• illiquid;
• non-transferable;
• unregulated;
• complex;
• difficult to value; and
• capable of producing a total loss of capital.

For that reason, UK financial-promotion rules restrict how certain high-risk investments may be communicated and to whom.

Investor eligibility processes are therefore an important part of the framework around some private investment opportunities.

Eligibility should not be confused with advice.

An investor meeting a particular legal or regulatory category does not mean an investment has been judged suitable for them, nor does it mean the investment is safe.

What should an investor look at before considering a loan note?

Due diligence should focus on the issuer as much as the instrument.

Useful areas to understand include:

• the exact legal issuer;
• directors and management;
• business model;
• historical financial information;
• current cash flow;
• existing borrowing;
• use of investor funds;
• interest obligations;
• repayment strategy;
• security;
• creditor ranking;
• asset valuations;
• liquidity;
• legal documentation;
• events of default;
• regulatory status;
• tax considerations; and
• the downside scenario.

Our guide to investment due diligence provides a more detailed framework for analysing private opportunities.

Check the issuer at Companies House

For a UK company, the Companies House record can provide a useful starting point.

Information can include:

• company status;
• incorporation date;
• directors;
• people with significant control;
• accounts;
• confirmation statements;
• registered charges;
• previous company names; and
• certain insolvency information.

This does not amount to government approval of an investment.

It is simply independent public information that can form part of the investor’s research.

Understand the company’s total debt

Looking only at the new loan note can create an incomplete picture.

An investor should also understand what the company already owes.

For example:

• Does a bank have first-ranking security?
• Are previous loan notes outstanding?
• How much trade debt exists?
• Are taxes overdue?
• Are shareholder loans outstanding?
• When does existing debt mature?
• Is new investor capital being used to refinance it?

The answer helps show where the new investor sits within the overall financial structure.

Understand how the issuer intends to repay the principal

Interest is only part of the obligation.

If a company raises a substantial amount of capital under loan notes, that original principal eventually needs to be repaid as well.

The expected source might be:

• operating cash;
• property sales;
• asset disposal;
• company sale;
• refinancing;
• institutional funding; or
• another identifiable source.

An investor should understand what needs to happen for that exit to work.

Our private credit investing guide looks more closely at credit quality, refinancing and repayment risk.

What happens if refinancing is needed?

Some issuers expect to refinance existing loan-note debt at maturity rather than accumulate enough cash to repay every creditor directly.

That can be a legitimate corporate-finance strategy.

But it introduces refinancing risk.

Future lenders may:

• charge more;
• lend less;
• require additional security;
• impose stricter terms; or
• decline the financing entirely.

An investor should therefore understand whether repayment depends upon financing that does not yet exist.

International investors have additional considerations

An investor based in Singapore, Hong Kong, Dubai, Qatar, Oman, Bermuda, the Bahamas or elsewhere faces the same issuer and credit questions as a UK investor.

But cross-border investment adds issues including:

• investor classification;
• local financial-promotion rules;
• cross-border taxation;
• withholding tax;
• double-taxation treaties;
• sterling currency exposure;
• international bank transfers;
• source-of-funds checks;
• governing law; and
• enforcement across jurisdictions.

Eligibility under one country’s investment regime does not automatically mean an investor meets every requirement under another country’s rules.

Professional cross-border legal and tax advice may therefore be appropriate.

Loan-note investing and currency risk

Where a loan note is denominated in sterling, an overseas investor is exposed to changes in sterling against their home currency.

The issuer might perform every contractual obligation in pounds while the investor experiences a different result after converting the proceeds into Singapore dollars, Hong Kong dollars, UAE dirhams or another currency.

The currency position therefore sits alongside the credit risk of the issuer.

Loan notes are not the same as cash savings

This distinction should always remain clear.

Money deposited with a bank and money lent directly to a private company are not economically equivalent simply because both may involve an interest payment.

A private loan-note investor can be exposed directly to:

• corporate failure;
• credit risk;
• illiquidity;
• asset values;
• management decisions;
• refinancing;
• security enforcement; and
• loss of capital.

The FCA’s current guidance specifically warns consumers not to compare high-risk unregulated loan-note investments casually with mainstream savings products.

Questions to ask when researching a loan note

A useful educational checklist includes:

• Who is issuing the loan note?
• What legal right does the note create?
• What does the company do?
• Why is it borrowing?
• What will the capital be used for?
• What existing debt does it have?
• Where does the note rank?
• Is it secured or unsecured?
• What specifically provides any security?
• Who holds that security?
• How has the secured asset been valued?
• What is the maturity date?
• Can maturity be extended?
• How are payments structured?
• Where does the cash to make those payments come from?
• How will the original capital be repaid?
• Can the note be transferred?
• Is there a realistic secondary market?
• What constitutes an event of default?
• What happens following default?
• What regulatory protections apply?
• What legal and tax issues apply to the investor?
• What is the realistic downside?

The purpose of those questions is not to determine whether somebody should invest.

It is to understand what the instrument actually represents.

How FJP Investment approaches loan-note opportunities

FJP Investment has operated within the alternative investment market since 2013 and considers opportunities across areas including private debt, loan notes, bonds, property and development finance, growth capital and other specialist structures.

FJP Investment acts as an introducer.

We do not provide personalised investment advice, assess personal suitability or manage investors’ money.

Where a loan-note opportunity is being considered for potential introduction, areas we may seek to understand include:

• the issuer;
• management;
• corporate structure;
• business model;
• financial information;
• use of funds;
• existing debt;
• the loan-note terms;
• security where applicable;
• valuations;
• creditor ranking;
• supporting documentation; and
• the proposed mechanism for meeting obligations to investors.

Reviewing an opportunity does not remove investment risk, constitute a recommendation or guarantee repayment.

Investors remain responsible for their own assessment and should obtain independent professional advice where appropriate.

You can read more about FJP Investment’s role on our How We Work page and about the areas we consider on our Alternative Investment Opportunities page.

Frequently asked questions about loan notes

What is a loan note in simple terms?

A loan note is a debt instrument recording money or another debt owed by an issuer to the noteholder under agreed contractual terms.

How does a loan note work?

In a typical private investment, an investor provides capital and becomes a creditor of the issuing company. The issuer then has contractual obligations concerning payments and repayment under the loan-note documentation.

Is a loan note a share?

Usually not. A conventional loan-note holder is a creditor rather than a shareholder, although convertible loan notes can include rights for debt to convert into equity.

Is a loan note the same as a bond?

The terminology overlaps and HMRC notes that loan note can be another name for a bond. However, individual debt instruments vary substantially in structure, liquidity, security and risk.

Is a loan note guaranteed?

No. A contractual obligation to repay does not guarantee that the issuer will have sufficient resources to do so. Investors can lose some or all of their capital.

What is a secured loan note?

A secured loan note benefits from a security arrangement over specified assets or rights. Security can improve a creditor’s position but does not guarantee full repayment.

Can a loan note be unsecured?

Yes. Unsecured noteholders rely primarily on the issuer’s general creditworthiness and rank according to the applicable contractual and insolvency position.

Can I sell a loan note before maturity?

It depends on the instrument. Some permit transfers, others restrict them, and many private loan notes have no active secondary market even where legal transfer is possible.

What happens if a loan-note issuer fails?

The outcome depends on the company’s assets, liabilities, security, creditor ranking and insolvency circumstances. Investors may recover all, part or none of the outstanding amount.

Are private loan notes FCA regulated?

Not necessarily. Private debt can involve regulated and unregulated activities. Investors should establish the regulatory position and protections applicable to the specific instrument and parties involved.

Are loan notes covered by the FSCS?

Many unregulated private loan-note investments do not benefit from mainstream FSCS protection. The position should be checked for the specific investment rather than assumed.

Does being eligible to receive information about a loan note mean it is suitable for me?

No. Investor eligibility and personal suitability are different concepts. Meeting an applicable investor classification does not mean an investment has been recommended, approved or judged suitable for that individual.

Final thoughts

A loan note is fundamentally evidence of debt.

That makes the basic concept relatively easy to explain.

A company owes money. The note records the creditor’s rights and the terms applying to repayment.

But understanding the piece of paper is not the same as understanding the investment risk.

The more important questions concern the issuer.

What does the company do?

Why does it need the money?

What other debt exists?

What supports the obligation?

Where does the investor rank?

And where will the money ultimately come from to repay the debt?

That is why loan notes should be analysed as credit investments rather than simply as documents carrying a contractual payment schedule.

FJP Investment provides general information about the alternative investment market and acts as an introducer to third-party opportunities. Specific opportunities are subject to applicable investor-eligibility, legal and regulatory requirements. If you wish to learn more about FJP Investment’s introduction process, you can register your interest below.

Capital is at risk. Loan notes and other private investments can be unregulated, complex, illiquid and/or non-transferable and investors may lose some or all of their capital. Contractual payment terms are not guarantees of payment. Security does not guarantee repayment. Where an investment is unregulated, investors may not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme. FJP Investment acts as an introducer and does not provide personalised investment, legal or tax advice or assess personal suitability. Investors should carry out their own due diligence and obtain independent professional advice where appropriate.