This is an illustrative scenario. The company and figures are invented.
Northgate Fabrication is a fictional precision engineering firm with steady revenue, a loyal customer base and an order book that has outgrown its workshop. The board wants to raise a £2m loan note to buy new machinery and expand. Here is how that might unfold, step by step.
Step 1: The first call
The finance director starts by explaining what the money is for and how the company expects to repay it. The adviser’s first questions are about cash, not ambition: how much spare cash the business generates each year, what debt it already has, and what would happen to repayments if a major customer left.
They agree that debt suits the business. It is established, profitable and does not want to give away shares. The machinery should increase output, which supports the case for paying a coupon.
Step 2: Shaping the terms
Over the next few weeks, the board works through the key choices:
- Term: long enough for the new machines to pay for themselves, short enough to appeal to investors.
- Coupon: a fixed rate, paid every six months, set at a level that is affordable from forecast cash flow with a margin to spare.
- Security: whether to offer a charge over the new machinery to make the note more attractive.
- Early repayment: a call option allowing the company to repay early from a set date if it can refinance on better terms.
The finance director models each option against a cautious forecast. The test is simple: could the business still pay every coupon if sales dipped for a year?
Step 3: The documents
Lawyers draft the loan note instrument, the legal document setting out the terms. Because the company is offering security, a security trustee is appointed to hold it on behalf of all noteholders. An information document is prepared explaining the business, the use of funds, the risks and the terms.
Any material shown to investors has to comply with the UK financial promotion rules, so it is reviewed and approved accordingly before it goes out. A data room is set up with accounts, contracts, asset valuations and the forecast.
Step 4: Finding investors
The company and its adviser build a list of suitable investors, people and firms who understand fixed-income investments and can accept the risks of lending to a private company. Introductions are made, meetings held and questions answered through the data room. Most questions are about repayment: what happens at maturity, and what if things go wrong?
Step 5: Closing
As commitments come in, the company tracks them against a minimum amount it has set in advance. Once that is reached, the note closes. Funds are received, notes are issued and each investor receives confirmation of their holding. The machinery is ordered.
Step 6: The first coupon
Six months later, the first coupon falls due. The finance director has diarised it since closing, along with every other payment date for the life of the note. The money is paid on the day, and a short update goes out alongside it: machines installed, output up, next update in three months.
The first coupon is the first proof that the promise in the document was real.
What to take from it
- Start with repayment. Every good loan note conversation begins with how the money comes back, not how it is spent.
- Test the coupon against a bad year. If it only works in the best case, it does not work.
- Documents take time. The instrument, security and financial promotion approval all need to be done properly before anyone invests.
- Treat payment dates as fixed. Reliability builds the trust you will need if you ever want to extend or refinance.
- Plan the end now. Northgate’s board has already sketched how it will repay at maturity. See planning loan note repayment for how to approach that.
Every real raise is different, but the order of steps rarely changes. If you can answer the questions at each stage before you start, the process runs far more smoothly.
This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.
Frequently asked questions
Agreeing the terms, preparing an information pack and the legal instrument, arranging security and a trustee where used, approaching investors who meet the relevant criteria, collecting subscriptions through escrow and issuing the notes once the minimum is reached.
Preparation often takes several weeks, and the raise itself can take from a few weeks to several months depending on the investor base and the quality of the pack. Companies usually underestimate the preparation stage.
Legal drafting, any arrangement or introduction fee, security and valuation costs, trustee and registrar fees, and the management time involved. These should be included in the amount raised.
