Founders tend to compare loan notes on one number: the coupon. It is the figure on the front of the term sheet and the one investors ask about first. It is also only part of what the money costs.
Here is how to add up the rest before you commit.
The coupon
The coupon is the interest you pay investors, usually quarterly or annually, or rolled up and paid at the end. Rolled-up interest helps cash flow in the early years, but it compounds, and the balance you owe at maturity can be materially larger than the amount you raised.
Model both versions. The cheaper-looking one on paper is not always the cheaper one in cash.
The fees around it
A loan note issue carries costs that do not appear in the coupon:
- Arrangement or placement fees paid to whoever introduces the investors.
- Legal costs for the instrument, the security documents and any trustee arrangement.
- Trustee or agent fees, often annual, if a security trustee holds the security on behalf of noteholders.
- Administration for registers, interest payments and investor communications over the life of the note.
Spread across a short term, these can add meaningfully to the effective cost of the money. Ask for them in writing and add them to the model.
The cost of security
Secured notes are easier to sell, but security is not free. Granting a charge over assets limits what else you can do with them. A future lender may want the same assets, and a first-ranking charge you have already given away can make the next facility harder or more expensive to arrange.
Think about what the security will cost you in flexibility, not just in legal fees.
The cost of your time
Every raise takes management attention away from running the business. A loan note with lighter documentation and a shorter process can be cheaper overall than one with a lower coupon that takes twice as long to close.
Putting it together
The useful number is the all-in annual cost: the coupon plus every fee, spread over the life of the note, plus a realistic view of the constraints it puts on you. Compare that across options, not the headline rate.
Done properly, it often changes the answer. Sometimes a slightly higher coupon with fewer strings is the better deal.
Mark Johnson is a Director of BDM Wealth Management, which introduces capital raising opportunities across bonds, loan notes, IPOs and SEIS/EIS. To discuss a raise, get in touch.
BDM Wealth Management is an introduction business and is not regulated. This article is general information, not financial, tax or legal advice, and does not constitute an offer or invitation to invest. Capital is at risk and you may get back less than you invest. For high-net-worth and sophisticated investors only. Take independent professional advice before making any investment decision.