Many UK Ex-pat and overseas investors will have experience of Savings Bonds that are offered by UK high street banks where a lump sum is invested for an agreed term, usually 1 to 5 years, in return for a slightly higher rate of interest than normal bank rates. At the end of the term, the original capital is returned together with the accumulated interest. Generally, the capital cannot be withdrawn during the agreed term of the bond and although the applicable interest rates are likely to still be quite low, your capital is usually safe. This safety net applies while the amount you hold remains below the UK government threshold as it guarantees that should your bank fail and your total holding with that banking group is below the set threshold, your capital would not be lost.
Loan notes operate in a fairly similar way but because they do not enjoy the government protection guarantees that are available with bank bonds, your investment may be at risk should the company issuing the loan note find itself in financial difficulty. Should the company issuing the loan note fail, or be unable to pay back the initial capital, in part or in whole, there would be no recourse to the financial ombudsman service for compensation and your money may be lost. In essence, you are taking risk by lending your money to a commercial company, for an agreed period of time, to achieve high returns on your capital.
How your capital is used
Where your Loan Note is issued by a property developer, your capital is usually used to facilitate the start of one of their new developments, often during the land purchase phase and project development stage which enables the developer to move ahead quickly and effectively without lengthy recourse to the commercial banks. In return for your financial support, property developers will pay a premium for your investment giving you returns on capital not easily achieved in to-days fixed sum savings market.
Investor suitability for investing in Loan Notes
Although investment in Loan Notes can produce high returns and free the investor from requiring to participate in the day to day functioning of the investment, these types of investments do carry risk.
This risk means that investors need to fully understand that should the investment issuing company become insolvent, or if it under performs in its chosen market area, the capital that was invested may not be fully returned or may even be lost.
For these reasons, investors who have limited experience with this type of investment should seek advice from professional financial and legal advisers, to ensure that the specific terms and conditions associated with the investment and the possible outcomes for the investment, good and bad, are fully understood prior to making any application to purchase a Lone Note.