Bonds and loan notes are both debt. Both promise a return over a fixed period. In conversation the words are used interchangeably, and in practice they behave differently enough that picking the wrong one costs a raise.
The practical difference
A bond is the more formal instrument. Standardised terms, often listed or issued at scale, designed to be held by many investors and in some cases traded between them. The structure is fixed and the documentation is heavier.
A loan note is the same promise with the paperwork loosened. Term, rate, security, conversion rights and repayment triggers are all negotiable. It is typically issued to a smaller group on terms written for that situation.
Bond: standardised, scalable, rigid. Loan note: bespoke, flexible, harder to administer at volume.
Which suits which situation
A bond suits a business raising a larger amount from a wider group on one set of terms, with predictable cash flows and something to secure against. The formality is a cost, and it buys credibility and reach.
A loan note suits a specific, time-boxed need — bridging a development, funding a purchase order, carrying a business to a milestone that re-rates it — where the terms need to fit the situation rather than the situation fit the terms.
What does not change
Whichever label is used, the same four questions decide whether it is sound.
- What is it secured against, valued by whom, held by whom?
- Where does it rank against existing debt?
- Where does the repayment money actually come from?
- What happens, in practice rather than on paper, if the company defaults?
An unsecured bond from a company with no assets is weaker than a first-charge loan note over a completed building, whatever the instruments are called.
The mistake worth avoiding
Choosing the instrument for what it signals rather than what it does. A bond because it sounds institutional. A loan note because it sounds easier.
Investors in this market read structures for a living. A mismatch between the instrument and the business is the first thing they notice, and it costs credibility before anyone reaches the numbers.
Start from what the business can actually service, and what it can actually secure. The right label follows from that.
Related reading
- What is a loan note, and how does it work?
- Running a bond issue: what is involved
- Secured vs unsecured bonds
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.