What is Convertible Loan?

Convertibles loan are the mixer of loan and equity financing. This loan are issued as loan stock with the right to convert them into equity shares at predetermined rate and date.

Investors consider it one of the safest financing as regular installment need not be paid. Commonly, after particular period this loan and its accrued interest is converted into equity capital.

These loans are attractive for the following reasons:

  • Issue cost is very low
  • The tax deduction is not applicable
  • No fixed installment payment
  • No processing cost
  • Low-interest rate

But Convertible loan has some disadvantages also:

  • Sometimes security may be needed
  • Existing shareholders may be aggrieved due to dilute of their shareholding position
  • The possibility that lenders may impose covenants by restricting the dividends or insisting on a minimum liquidity ratio.