What Is a Loan Note? The Ultimate Guide

Loan notes have become increasingly popular in the investment world—often promoted as high-return, fixed-income opportunities. But what exactly are they, how do they work, and what are the risks involved?

This comprehensive guide explains everything you need to know about loan notes, whether you’re considering investing, recovering funds from a failed scheme, or trying to understand how they operate within company finance and insolvency.

What Is a Loan Note?

A loan note is a formal legal agreement between a borrower and a lender. It outlines the terms under which money has been loaned and specifies the obligations for repayment—usually including the principal amount, interest rate, term, and any applicable security or penalties.

While similar to a simple IOU, loan notes are more sophisticated. They are typically used in corporate finance, private investments, and alternative funding arrangements, often outside of traditional bank loans.

Common Uses of Loan Notes:

• Raising capital for business growth
• Funding property developments
• Restructuring company debt
• Offering fixed-return investment products
• Bridging finance or short-term lending

Key Features of a Loan Note

Principal

The amount of money borrowed by the issuer.

Interest Rate

The agreed return on the loan, which can be fixed or variable.

Loan Term

The period over which the loan must be repaid (e.g., 12, 24, 36 or 60 months).

Repayment Structure

How and when repayments will be made—monthly interest, bullet repayment at the end, or other terms.

Security

Some loan notes are secured against assets like property or shares. Others are unsecured, meaning the investor has no collateral if the borrower defaults.

Events of Default

Clauses outlining what happens if the borrower fails to meet the terms, including late payment or insolvency.

The Role of Security Trustees

When a loan note is described as “secured,” it often involves a security trustee—an independent party appointed to hold and enforce the security on behalf of multiple investors.

What Is a Security Trustee?

A security trustee is a company or individual that holds a legal charge (or other form of security) over an asset on behalf of loan note holders. This arrangement is particularly common when:

• There are multiple lenders or investors
  
• The loan note is structured as part of a collective investment
  
• The borrower offers security over assets such as property, shares, or cash flows
  

The trustee’s primary role is to act in the best interest of noteholders, ensuring that their rights are protected if the borrower defaults or becomes insolvent.

The Three-Way Relationship

A typical secured loan note involves three parties:

1. Borrower – The company raising funds via loan notes
   
2. Lender / Investor – The individual or entity providing the loan capital
   
3. Security Trustee – The third party holding the security in trust for all lenders
   

This structure is designed to simplify enforcement. Instead of each lender acting individually, the security trustee takes coordinated action on behalf of all noteholders—whether that means appointing administrators, enforcing charges, or initiating legal proceedings.

Key Responsibilities of a Security Trustee

• Holding Security: Legally owns or controls the asset(s) pledged as security.
  
• Monitoring Compliance: May monitor the borrower’s compliance with loan terms.
  
• Acting on Default: Has the authority to enforce the security in the event of non-payment or insolvency.
  
• Distributing Proceeds: Ensures any recovered funds are distributed fairly among noteholders.
  

Potential Problems

While the concept offers investor protection, security trustees are not always effective. Common issues include:

• Trustees appointed by the borrower, leading to a conflict of interest
  
• Passive or inactive trustees who fail to act when needed
  
• Vague or unenforceable security arrangements
  
• Legal limitations on trustee powers—especially in offshore schemes

Types of Loan Notes

Understanding the type of loan note is essential, as this determines the level of risk and recovery options:

Secured Loan Notes

Backed by specific assets. In theory, if the borrower defaults, the lender can claim the secured asset to recover their investment.

Unsecured Loan Notes

No collateral is offered. Therefore, the investor’s only option in case of default is to pursue legal action, which may not result in recovery.

Convertible Loan Notes

Include a clause that allows the loan to auto convert into equity (shares) in the issuing company at a future date or under certain conditions.

Offshore Loan Notes

Issued by companies registered in jurisdictions like Gibraltar, BVI, or Cyprus. These can be difficult to enforce, and lack regulatory oversight.

Why Are Loan Notes Popular?

Loan notes are often promoted as alternative investments offering higher fixed returns than traditional savings or bonds. They appeal to:

• Investors seeking predictable income
• Businesses looking for flexible finance without giving up equity
• Advisers and introducers who earn huge commissions on sales

Unfortunately, this popularity has also led to widespread misuse, particularly among unregulated schemes.

Are Loan Notes Safe?

Loan notes can be legitimate—but most are high-risk and unregulated, leaving investors vulnerable to loss. It’s essential to understand the structure behind the investment.

Risks Include:

• Lack of Financial Conduct Authority (FCA) oversight
• Inflated promises of returns
• Complex or opaque company structures
• Unclear or unenforceable security
• Use of offshore jurisdictions that further limit accountability
• Companies that exploit the use of loan notes to line their own pockets

Promoters often use marketing terms like “secured,” “asset-backed,” or “guaranteed,” which can mislead investors if the actual protections are weak or unenforceable.

How Loan Notes Are Misused

In recent years, many loan note schemes have been linked to:

• Property development companies with no completed projects
• ““Green”” or renewable energy firms promising unsustainable returns
• Hospitality, hotel, and student housing schemes
• Companies issuing loan notes as part of Ponzi-style investment models

The collapse of these schemes has led to thousands of investors losing significant sums—often their entire investment or pension pots.

Loan Notes and Pensions

One of the most dangerous trends has been the use of Self-Invested Personal Pensions (SIPPs) or Qualifying Recognised Overseas Pension Schemes (QROPS) to buy loan notes. Many investors were:

• Encouraged to transfer pensions by unregulated advisers
• Told the investments were secure or low risk
• Not informed of the loss of FSCS protection
• Left with worthless investments inside their pension wrappers

This type of mis-selling is now the subject of legal claims and regulatory investigations.

What Happens If the Issuer Defaults?

If the company issuing a loan note becomes insolvent, the lender (you) becomes a creditor. However, the likelihood of recovering your money depends on several factors:

• Whether you are a secured or unsecured creditor
• The value of the security, if any
• Your position in the creditor hierarchy (banks, HMRC, employees usually come first)
• The competence and transparency of the liquidator or administrator

In many cases, investors receive only a small percentage of their original investment, or nothing at all.

Red Flags to Watch For

Before you invest in a, look out for these common warning signs:

• Promises of high fixed returns (above 10%)
• Vague or overcomplicated security arrangements
• Cold calls or unsolicited offers
• Pressure to act quickly or ““before a deadline””
• Unregulated advisers or introducers
• Offshore companies or unclear ownership structures
• No clear exit strategy or secondary market
• Companies with short history, Directors with a history of dissolved companies or bankruptcy
• Poor reviews

If something doesn’t feel right—trust your instincts.

What to Do If You’ve Been Mis-Sold a Loan Note

If you’ve already invested and are concerned about the legitimacy of your loan note, you may still have options. You could be eligible to:

• Recover funds through a civil claims or a statutory demands
• Wind- up the issuing company or connected entities
• Pursue individuals under director liability rules
• Challenge the role or inaction of security trustees

Insolvency & Law specialises in helping loan note holders who have been misled, ignored, or left in the dark.

How We Can Help

At Insolvency & Law, we:

• Investigate failed schemes
• Advise on creditor rights and legal remedies
• Represent investors in insolvency proceedings
• Challenge Security Trustees and directors
• Recover funds through litigation or insolvency action

Our team has handled some of the UK’s most complex investment recovery cases. Therefore, if you’ve lost money, or are worried about a current investment, we can help.

Final Thoughts: Should You Trust Loan Notes?

They may sound technical, but they can represent anything from a smart lending agreement to a high-risk investment dressed in financial jargon.

If you plan to invest, seek independent advice, verify the company’s regulatory status, and ensure you fully understand the risks.

If you’ve already invested and feel concerned about the situation, act quickly before it gets worse.

Contact Us

If you’re involved in a loan note dispute, facing losses from a failed investment, or want to explore recovery options:

 Email: [email protected]
Call: 0207 504 2700 Our expert team is available for free, confidential advice

Frequently Asked Questions (FAQs)

Q: Are loan notes regulated in the UK?
A: Not always. Many are unregulated and sold outside the FCA’s remit.

Q: Can I recover money from a failed loan note?
A: Yes, depending on the structure and whether there was mis-selling, fraud, or director liability involved.

Q: Are loan notes the same as bonds?
A: No. Loan notes are typically private and less liquid. Bonds are usually listed, tradeable, and more heavily regulated.