Convertible Notes
These are loans that may be converted to equity (usually at the lender’s option).
A convertible note (which is one type of convertible interest) is a type of investment an individual or financial institution can make in your company or unit trust. A convertible note earns interest on the amount paid to acquire the note until the note's expiry date. On expiry of the note, the lender can choose to either ask for the return of the money paid or convert that amount to acquire new shares or units in your business.
The tax treatment that applies when the convertible notes are converted to shares depends on when the lender acquired the convertible notes, the type of convertible note, when the conversion occurred and when the convertible note was issued. In Australia shares acquired by the conversion of a convertible note on or after 20 September 1985 will be subject to CGT when they are sold or disposed of as the shares are taken to be acquired when the conversion happens.
Convertible notes are not generally available to small businesses or unlisted companies. However may be available to growing businesses or larger companies seeking a combination of debt and equity. Venture capital funds often use convertible notes.
The interest rate applied to convertible notes is usually fixed.
Term is usually 2-7 years fixed. Conversion rate to equity is set at time of issue into a fixed number of shares.
Convertible notes may be secured or unsecured depending on the size and quality of the borrower.
At maturity the lender either converts to equity, which waters down existing shareholders or seeks repayment. Repayment may require the borrower to refinance with more equity, new notes or other forms of loans. If repayment is not made the lender will have rights against the assets of the borrower either as secured or unsecured creditor.
BizExchange understands that whether you are buying or selling a business, business financing is a likely consideration. We also know that finding the right person at the bank to deal with your issues is not always as easy as it should be.
This is why we have established relationships with a range of financial providers so that you can complete one form and have it received by the right person at each of the institutions you have nominated. Not only that, we know their lending criteria, so we will only present you with the banks that are prepared to consider your application.
