An alternative method of raising finance, more and more individuals are turning to loan notes, both as an alternative means to secure finance or as an alternative means to grow their money.

But what is a loan note investment, and why are so many people turning to this alternative financial instrument?

What is a Loan Note?

A loan note, a form of debt investment, is a means of raising finance for a company, with the money being raised by an investor.

The investor issues a loan to a company in exchange for an agreement to pay it back at a fixed date in the future plus interest.

Loans can include multiple lenders and often have additional repayment terms such as exit clauses.

Why Do Developers Use Loan Notes?

In the property sector, we have seen a tightening on lending since the 2008 financial crisis by traditional lenders, making it increasingly difficult for developers to get projects off the ground through traditional loans.

The method of finance is more flexible for developers.

The developer determines the amount of money they wish to raise and the repayment schedule to investors.

Investors are made aware of these terms before investing.

Developers rely on the loan note method to get projects started.

With the UK currently facing something of a housing crisis, this finance is also important for the wider economy.

Investor Benefits of Loan Note Investing

Investors are turning to loan notes due to both the consistency and the high level of returns to be made.

Loans of this nature are typically short term and have a clearly defined exit strategy before committing to the loan.

Most loans of this nature also offer exit clauses every 12 months, although this differs depending on the developer.

A recent survey by FJP Investment supports these perceived benefits.

From a sample of 950 verified UK investors, 30% stated they are interested in turning to debt investment due to the regular, high level of fixed returns.

Loan notes have a pre-determined date of maturity, something that many investors value.

With the political and economic uncertainty currently facing the UK, investors generally do not want to commit to long term investments such as buy to let and see value in the short term, profitable loan note method.

The Benefits Extend Further

Aside from the benefits to both the developer and investor, as touched on earlier, the finance helps the economy too.

The UK currently has a growing number of people living in unsuitable housing.

Whether the property itself is too large and unaffordable or simply too small for a growing family, buyers are having difficulties finding suitable housing, more property needs to be built to support this.

The Government pledged to build 300,000 new homes over the next five years, yet we are falling short of this target, hitting a paltry 180,000 last year.

By supporting developers that are unable to secure finance through traditional lenders, as an investor you are also helping to mitigate this growing crisis of housing across the UK.

To many, this is a win-win situation, which needs to be made more aware to potential investors.