Large numbers of businesses operating around are in need of making arrangements for funds for investment purposes. It helps in keeping the wheel moving so that normal and most optimal business activities may be assured. Some businesses prefer taking loans, debts or mortgages from the lending institutions while some others look around for investors that may invest in their business. In this respect, the option for convertible loans or referred to as CLN in short has become quite popular. It is basically a type of short-term debt. It is different from the loans or debts that are taken by the businesses normally. Let us try to know about such a type of loan note in a somewhat detailed manner.
What CLN Is?
As already stated, CLN or convertible loan note is a loan or debt that is offered on a short-term basis. The debt amount is converted into equity shares later on. The amount of the equity shares is usually decided on how the company being invested in is evaluated in near future.
Who Gets Benefited?
Well, both the parties get benefited through this type of loan note. It is because the given company that needs a loan or capital investment gets the funds needed. At the same time, the investors also get a discount on the prices of their shares in the company. The extent of the discount may depend upon the valuation of the company on a date that is determined later on. It means the investors remain initially unaware about the current or even future valuation of the company in which they are going to make an investment.
Is CLN A Loan Or Equity Share?
In the initial stages, the convertible loan is basically a short-term debt or loan that is being granted to the given company. The loan may be converted into an equity share later on. The conversion of the loan into equity shares and the value of the shares thus formed are entirely based on the valuation of the company at later stages. Generally, the conversion process is initiated during the funding round or when the predetermined date approaches.
Is The CLN Repayable?
Well, the company into which the investors are making an investment in the form of CLN is liable to repay the entire amount of the capital investment along with the interest rate applicable as per the terms and conditions mutually agreed between the two parties. It happens in such situations when the given company is unable to reach the funding target by the due date as a result of which the conversion of investment into equity shares is not possible. The entire convertible loan note amount is to be paid by the said company then.
This was all about CLN or convertible notes. You just need to be very careful while opting for this investment option.
