Loan notes, MBOs and income deals: investing for yield, not just exits
Why some of the best deals for a certified investor pay a coupon rather than promising an exit, how secured loan notes into profitable businesses and buy-outs work, what protection you actually have, and how they sit alongside SEIS equity in a portfolio.
Not every listing on Find is a start-up hoping for a 10× exit. Some are profitable businesses buying a competitor, management teams buying the founder out, or established firms funding growth — and what they offer is a secured loan note paying 8–12% a year, sometimes with a small equity kicker. No SEIS relief, no moonshot; a contracted return from a business with accounts you can read. For many investors they are the steadier half of the portfolio.
What a loan note is
A loan to the company, documented as a note, with a fixed interest rate, a repayment date (typically three to five years), and often security — a debenture over the company's assets, sometimes a charge over specific assets, occasionally a personal guarantee from the owners. Interest is paid quarterly or rolled up; the principal is repaid at the end or amortised. Some notes carry a conversion right or warrants: a small slice of equity if things go well.
Where they come from on Find
- Management buy-outs. A team buying the business they run. Senior debt from a bank covers part; investor loan notes fill the gap between that and the price. Security ranks behind the bank but ahead of the management's equity.
- Acquisitions. A profitable firm buying another — an accountancy practice buying a fee block, a contractor buying a rival. Notes fund the completion payment, repaid from the combined cash flow.
- Growth in profitable businesses. A second site, a fleet, a stock build, where the owner would rather pay interest than give away equity.
What to check
- Cover. Cash available for debt service divided by total debt service, including the bank ahead of you. Below 1.3× is thin; a bad year breaks it.
- Ranking. Who gets paid before you on a failure — the bank, HMRC's preferential claim, employees. Second-ranking security in a business with little asset value is closer to equity than it looks.
- What the security is worth. A debenture over a services firm is a charge over debtors and goodwill. A charge over freehold property or plant is a charge over something that can be sold.
- The people. In an MBO the management are the business; read their track record in it, not their plan for it.
- Exit for you. Repayment from trading cash, a refinance, or a sale. If the only route is a sale, you hold equity risk at a debt return.
Tax
Interest is income, taxed at your marginal rate. No SEIS/EIS. Losses on a loan note are capital losses (if it is a qualifying corporate bond, potentially no loss relief at all — check the instrument). The after-tax return on a 10% note for a 45% taxpayer is 5.5%; compare that with the SEIS arithmetic before deciding the mix.
How they fit alongside SEIS equity
Equity cheques pay nothing for five years and then, sometimes, a great deal. Notes pay every quarter and return the principal on a date. A portfolio with both has income while it waits, and the notes' cash flow can fund the next SEIS slice. Many certified investors on Find run roughly half and half, with the notes concentrated in businesses whose accounts they understand — often their own sector.
Questions investors ask
"Is a 10% coupon high?"
For a secured note behind a bank in a small profitable business, 8–12% is the range. Above 15% the business is paying for risk it should not be taking; below 7% you are not being paid for illiquidity.
"Can I invest in a note through my company or SIPP?"
A company can; a SIPP usually cannot hold unlisted loan notes without tax charges. Ask your adviser.
"Who holds the security?"
With several note holders, a security trustee or a lead note holder holds it on behalf of all. Check the intercreditor terms: who can enforce, and when.