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"Convertible loans" also know as a "Convertible notes" or "Convertible debt" refer to any type of investment made initially by loan that can, or must convert, in whole or in part to shares. This is a financing structure used by many companies.
An investment through a convertible note has a number of advantages when compared to an equity investment. The major advantages are summarised below in the downloadable convertible loan guide.
To read our full guide on Convertible Loans please find the link to the download at the bottom of the page.
Example: Harry invests £1,000 at 9% for a term of 360 days. The note converts at a 10% discount to the market price.
Harry can treat the loan as a straight loan and receive £1,090 (loan interest of £90 after 360 days)
Harry can convert part or all of the loan. Harry decides to convert the entire loan on the 360th day. The total amount to convert is £1,090 The market price for the PLC share is 20p/21p, Harry will be issued with 6055 shares at the discounted price of 18p with the balance of 10p refunded.
If Harry then sells all of the shares at 21p he will receive £1,271.55. This will give Harry a profit of about £270 before costs.
Download our full guide to convertible loans here.