Now, there is no need of getting into any equity-funding round where the shares are issued for collecting funds rather the companies can rely on the convertible loan note scheme. CLN is mainly treated as a debt-instrument not as an equity-instrument. CLN has been recently categorised into two broad categories like unsecured and secured CLN. In case of secured CLN loans are being secured against assets while in case of unsecured CLN an agreement is being in between the parties, the investor and the borrower.
What is the need of CLN?
Convertible loan note has become quite a popular concept these days.Since equity issuing procedure is quite a lengthy process and involves a lot of documents therefore most companies are opting for CLN as the most convenient and flexible option of gaining funds for the business. CLN is nothing but a kind of loan to your business and this loan can be easily acquired without any documentation except a legal agreement.
This loan can certainly satisfy the fund requirement of your company. You can either make the loan repay or else you can issue shares giving the right to the investor that he can encash the share at any point of time as per his requirement. In this case, no defined valuation takes place and this is one of the greatest advantages of this debt scheme. Initially, CLN will remain in a debt form only but if your company performs well then the investor can certainly get the invested funds converted into equities in future.
CLN terms are very much different from that of the equity-issue terms and thus you should have a fair knowledge about the same so that you can grab the debt for your company in an easier way. In this case, till the first round of equity negotiation over company evaluation can be delayed. Even if your company is not profitable at all then also you will receive the debts but of course the amount can be less. The investors will wait evaluating your company till your company comes to a stronger position.
The convertible loan note gets approved quickly and thus you do not require waiting for a longer time receiving funds for your company. If your company performs well then the investor will make the loan converted into shares otherwise you have to repay off the loan either on demand immediately after any default event or on the scheduled maturity date.