Every business looks for outside finances as they open and wants to create a hold in the market. Moreover, even established companies try raising funds from external sources for expansion. They can raise the money by selling their shares, distributing equity or opting for convertible loan notes. Whatever way you opt for generating funds, it is vital to understand the pros and cons associated with that process.
The option that most business owners are opting for these days is the convertible loan note. Under this, the company sells a bond in return for the funds they take from the investor. It is for the investor to decide whether he wants equity, cash exchange with interest or the company shares. The company gets the money they need for establishment or expansion. At the same time, the investor has the option to choose whatever he wants in return. Hence, it is fair to say that it is a win-win situation for everyone.
Can Convertible Loan Notes Be Dangerous?
Though this fundraising option offers plenty of perks, it also has a few drawbacks. Some of the dangers associated with this option are discussed below.
Future Implications
One of the potential dangers is the future implications. What if the company doesn’t do well and the investors start asking for their shares. You will not be in a position to satisfy your investor, and it will earn a poor name for your brand.
Lack Of Cash
What if the investor wants the cash after the company does well, but you do not have enough finances to compensate for it. Though there is an option to sell shares or equity, the choice lies with the investor only. Thus, you should consider discussing the possibilities with your investor beforehand and deal with this situation before it even arises.
Restricted Future Funding
It is a con that small companies often come across. Once an investor has already put money into your business through convertible loans, new feeders might not want to put in more money. Though big companies will never experience such situations, start-ups can!
Situation At Maturity
You cannot predict the situation at the time of maturity of the convertible loan note. Investors will give money for a fixed period, after which they would want the returns! Things can get complicated if you do not have the finances to compensate for their return requests. It is a dangerous scenario for investors and owners who choose this funding option.
These are the dangers associated with this fundraising option. However, one can deal with them conveniently with vigilance. The business owner should frame a policy carefully after analysing all possible scenarios. Make sure you have a solution for every possible situation and explain it to your investors in detail. You can also seek suggestions from financial experts to frame a perfect document, and there will be no complications.
