How Convertible Debt Financing Works

Estimated read time 3 min read

Have you heard of convertible debt financing? Also known as convertible bond or convertible note financing, it’s popular among startups. Startups often lack the creditworthiness of seasoned, well-established businesses. As a result, they may struggle to obtain loans. Debt financing is an alternative solution, though. Even if your business is still in the early stages of its operations, you may be able to finance it with convertible debt.

How Convertible Debt Financing Works

What Is Convertible Debt Financing?

Convertible debt financing is a type of loan that converts into equity for the investor. It’s offered by angel investors and venture capitalists.

If you need capital to start or grow your business, you may want can obtain convertible debt financing from an investor. The investor will provide you with a fixed amount of capital. After a certain amount of time has passed — this is known as the maturity date — the amount of the loan will be converted into equity. In other words, the investor will own part of your business.

Advantages of Convertible Debt Financing

With convertible debt financing, you can obtain capital with bad credit or even no credit. Angel investors and venture capitalists aren’t concerned about creditworthiness. Rather, they want to know that your business will succeed. If you have a compelling pitch that makes your business stand out, they may invest in your business by offering convertible debt financing.

You typically won’t be required to repay convertible debt financing. Convertible debt financing isn’t the same as a traditional loan. Traditional loans require repayment, whereas convertible debt financing does not. Instead, the investor will obtain equity in your business after the convertible note has matured.

Disadvantages of Convertible Debt Financing

As a form of equity financing, you’ll have to give up equity with convertible debt financing. Equity is ownership. Convertible debt financing is a special type of loan that’s automatically converted into equity on the maturity date.

While you don’t have to pay back the principal, you may be required to pay interest. Convertible debt financing has interest fees. Investors may set an interest rate of 2% to 8%. You’ll have to pay interest on the convertible note until it has matured. Once it has matured, it will be converted into equity, in which case you’ll no longer be required to pay interest on it.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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