Secured Notes: How To Raise Debt With Security

Looking to raise capital without giving away equity, but still want to give investors comfort? Secured notes might be the right fit.

They’re a flexible way to borrow money while granting security over your company’s assets, often at a lower interest rate than unsecured debt. But there are important legal steps to get right - from structuring the security to registering charges and ensuring your offer complies with financial promotion rules.

In this guide, we’ll explain what secured notes are, how they compare to other options, the types of security you can offer, the essential terms to include, and the key compliance steps under UK law.

What Are Secured Notes And How Do They Work?

A secured note is a debt instrument issued by your company (the borrower) to one or more investors (the noteholders). The notes set out how much you’re borrowing, the interest, repayment terms, and - critically - what security the noteholders have over your assets if you can’t repay.

In practice, the “security” is documented in a security agreement (often a debenture or a suite of specific asset charges). If your company defaults, the noteholders (or a security trustee acting for them) can enforce that security to recover the debt ahead of unsecured creditors.

Key concepts to understand:

• Principal and interest: the amount you borrow and the return paid to investors (fixed or variable).
• Security: a fixed charge over specific assets (like IP or equipment) and/or a floating charge over changing assets (like stock or receivables).
• Priority: secured creditors rank ahead of unsecured creditors. Fixed charges generally take priority over floating charges, but note HMRC’s secondary preferential status for certain taxes in insolvency.
• Maturity and repayment: a date (or schedule) for paying back principal, plus any early repayment mechanics.
• Default and enforcement: what counts as a default and the enforcement process (including appointing an administrator or enforcing specific charges).

If you’re weighing up whether to issue loan notes or take out a straightforward loan, secured notes can be attractive because you can tailor commercial and security terms for multiple investors within one instrument, often using a security trustee structure.

Secured Notes Vs Other Funding Options

Before you commit, it’s smart to compare secured notes with common alternatives and choose the route that best supports your growth plans.

Secured Notes vs Unsecured Loans

• Cost of capital: secured notes typically carry lower interest than unsecured borrowing because investors have collateral.
• Investor appetite: security can broaden your investor pool and increase ticket sizes.
• Complexity: expect more documentation and filing steps, including Companies House charge registration.

Secured Notes vs Convertible Instruments

Convertible instruments (for example, a Convertible Note, or equity pre-payment tools like a SAFE or ASA) swap some or all of the debt for shares in future. Secured notes, by contrast, are plain debt - investors expect cash repayment and rely on security if things go wrong.

• Dilution: secured notes don’t dilute ownership (unless you build in a conversion feature).
• Control: no new voting rights for investors, though noteholders may have consent rights on key actions (e.g. new debt, disposals).
• Security: convertibles are often unsecured. If you want the certainty of collateral, secured notes win.

Secured Notes vs Equity

• Speed and control: debt can be faster and avoids negotiating valuation and shareholder rights.
• Cash flow: you’ll need to service interest and repay principal; equity has no mandatory repayments but dilutes ownership and may require a Shareholders Agreement.
• Investor profile: secured notes may appeal to income-focused or risk-sensitive investors.

What Security Can You Grant For Secured Notes?

The security package is the backbone of a secured note. It should reflect how your business creates value and the assets investors can rely on if there’s a default.

Common Forms Of Security

• All-assets debenture: a comprehensive instrument creating fixed and floating charges over essentially all present and future assets. This is common where multiple investors come in under one note instrument.
• Specific charges: targeted security, e.g. a fixed charge over intellectual property, equipment or a bank account, combined with a floating charge over circulating assets like stock or book debts.
• Receivables charge: a fixed or qualifying floating charge over invoices and contract rights (often useful for recurring revenue businesses).
• IP charge: a fixed charge over trade marks, copyrights and patents. Pair with solid IP ownership practices and registrations to make this meaningful.

For many SMEs, a single, well-drafted General Security Agreement (or debenture) is used to grant fixed and floating charges across the group. Where multiple investors are involved, a security trustee typically holds the security on their behalf to streamline enforcement and voting.

Fixed Vs Floating Charges (Why It Matters)

Fixed charges attach to identifiable assets and restrict your ability to dispose of them without consent. They usually rank ahead of floating charges in insolvency.

Floating charges “float” over changing asset pools (like stock). You can deal with these assets in the ordinary course of business until the charge crystallises (e.g. on default or insolvency). Floating charges rank behind certain preferential creditors and are subject to the “prescribed part” ringfenced for unsecured creditors under the Insolvency Act 1986.

Getting this right requires careful drafting. Labeling a charge “fixed” isn’t enough - the degree of control the lender has over the asset (e.g. restricted withdrawals on a charged bank account) affects how the courts will characterise it.

What Terms Should Go In A Secured Note (And Security) Package?

Your secured note will usually sit alongside a security agreement. Together, they cover commercial, security and intercreditor terms. Here’s what to expect.

Key Commercial Terms In The Notes

• Principal and availability: single draw or multiple draws; any conditions precedent before funds are advanced.
• Interest: rate type (fixed, variable, PIK), compounding, payment timing, and default interest.
• Term and repayment: bullet maturity, amortisation schedule, prepayment rights, call protection or early redemption fees.
• Covenants: information undertakings, restrictions on additional debt, negative pledge (no new security without consent), and disposals limitations.
• Events of default: non-payment, breach of covenant, cross-default, insolvency events, change of control.
• Investor protections: consent rights over major actions, transfer restrictions on the notes, and noteholder meeting/voting mechanics.

Core Security Terms

• Scope of security: which assets are charged, and whether by fixed or floating charge.
• Guarantees: upstream or cross-guarantees from group companies (avoid unlawful financial assistance issues for public companies).
• Enforcement: step-in rights, appointment of a receiver/administrator, sale procedures and application of proceeds.
• Perfection and registration: Companies House filing within the statutory deadline (more below), and any asset-level registrations (e.g. IP).

Intercreditor And Priority Arrangements

If you have (or plan to have) other lenders, a priority or intercreditor deed is essential to avoid disputes in an enforcement scenario. It can:

• Rank creditors (e.g. senior bank debt ahead of the secured notes).
• Set standstill periods and enforcement controls.
• Allocate proceeds waterfall between different creditors.

If you anticipate an equity event later (e.g. conversion or restructuring), it’s sensible to pre-agree how noteholders are treated - including any optional debt-for-equity swaps on a default or negotiated basis.

Tax And Payment Mechanics

• Withholding tax: UK-source interest paid to overseas investors may require withholding (typically 20%) unless a treaty relief applies. Build in gross-up clauses and investor cooperation obligations.
• Default interest and fees: consider their enforceability and drafting to avoid being characterised as penalties.
• Transfer mechanics: conditions and process for investors to transfer notes, including KYC/AML checks.

Avoid relying on generic templates - bespoke secured note packages and a robust Loan Agreement-style approach for interest, default and covenant terms will protect you if performance dips.

Legal And Compliance Steps In The UK

Issuing secured notes involves several must-do legal steps. Ticking these off early keeps your raise on track and helps you stay protected from day one.

1) Company Approvals And Authority

• Board approvals: directors should pass resolutions approving the notes and security, and authorising execution.
• Shareholder approvals: check your articles and any investor agreements for restrictions on borrowing or granting security.
• Directors’ duties: ensure the borrowing is in the company’s best interests, especially if you’re close to the insolvency zone.

2) Prepare The Document Suite

• Secured note instrument: covers principal, interest, maturity, covenants and default.
• Security agreement: a debenture or General Security Agreement creating fixed and floating charges, plus any specific asset charges (e.g. IP, receivables).
• Intercreditor deed: if other lenders exist or are expected.
• Security trust deed: where a trustee holds security for multiple noteholders.

If you’re unsure whether a debt or equity-style instrument better suits your stage and investor base, sense-check against options like a Convertible Note or a SAFE or ASA before finalising your structure.

3) Register Charges At Companies House (Within 21 Days)

Under the Companies Act 2006 (and related regulations), most security interests granted by a UK company must be registered at Companies House within 21 days of creation (s.859A regime) using the appropriate form and fee. If you miss the deadline, the security becomes void against a liquidator, administrator or other creditors - a serious risk for investors and your credibility.

Practical tips:

• File promptly after execution and keep stamped copies.
• Register any asset-specific charges where relevant (e.g. record IP charges against the relevant registers).
• Update your statutory registers and corporate records.

4) Financial Promotions And Offering Compliance

Be careful when marketing your secured notes. Under the Financial Services and Markets Act 2000, you generally can’t communicate an invitation or inducement to invest unless an authorised person approves it, or an exemption applies (e.g. high net worth or sophisticated investor exemptions). Broad public marketing can trigger prospectus or other securities law issues.

To stay compliant:

• Limit invitations to a private list of eligible investors and keep records of the basis for eligibility.
• Use clear, fair and not misleading materials and disclaimers.
• Seek approval from an FCA-authorised firm where needed.

5) Perfection, Priority And Searches

• Conduct Companies House searches to check existing charges and ensure you can grant first-priority security (or agree intercreditor terms).
• Consider negative pledge clauses to restrict later-ranking security without consent.
• If bank facilities exist, check whether you need lender consent before granting new security.

6) Ongoing Compliance And Reporting

• Deliver periodic financial information to noteholders as agreed.
• Monitor covenants (e.g. leverage, cash runway) and seek waivers early if required.
• Plan ahead for maturity - refinance, repay, or negotiate extensions well before the due date.

Common Pitfalls And How To Avoid Them

Secured note deals often move fast. Here are the traps we see most often - and how to sidestep them.

Missing The 21-Day Registration Deadline

Failing to file a charge in time can render the security void against insolvency officeholders and other creditors. Avoid this by planning filings before completion, getting documents e-signed in the correct order, and diarising the deadline as non-negotiable.

Weak Fixed Charge Drafting

Calling a charge “fixed” doesn’t make it fixed. If investors don’t have sufficient control over the asset (e.g. ringfenced bank account with withdrawal controls), a court may treat it as floating, which can erode priority. Use robust drafting and asset control mechanics.

Overlooking Existing Lender Restrictions

Bank facilities often prohibit additional security or require consent. Review your finance documents early and be upfront with noteholders about any constraints.

Financial Promotion Missteps

Sending a mass email or posting a public webpage inviting the general public to invest can breach the financial promotion restriction. Keep offers targeted, rely on valid exemptions, and get materials signed off by an authorised firm where appropriate.

Tax Surprises On Cross‑Border Investors

UK withholding tax on interest to overseas investors can bite if you don’t cater for it in the documentation. Use treaty relief processes where available and “gross-up” clauses so you’re not left short.

No Plan For Refinancing Or Equity Events

Leaving maturity planning to the last minute invites default risk. Build options into the notes (extension mechanics, consented refinancing) and maintain proactive investor communications. If an equity round is likely, align your note and security terms with potential future instruments - including whether a consensual conversion or debt-for-equity swap could be on the table.

Key Takeaways

• Secured notes are debt instruments backed by collateral, offering investors priority over unsecured creditors and often reducing your cost of capital compared to unsecured borrowing.
• Choose the right structure for your stage: if avoiding dilution is key, secured notes can be a strong alternative to convertibles and equity - but sense-check them against tools like a Convertible Note or a SAFE or ASA.
• Build a security package that reflects your assets and operations: a debenture or General Security Agreement with well‑drafted fixed and floating charges is standard, with intercreditor arrangements where other lenders are involved.
• Get the legals right from day one: board approvals, airtight note and security documents, Companies House charge registration within 21 days, and compliant investor communications are all essential.
• Watch out for common risks: mischaracterised fixed charges, breaching bank covenants, financial promotion missteps, and withholding tax on overseas investors can undermine the raise if not handled up front.
• Don’t rely on templates for complex debt: secured note deals benefit from bespoke drafting similar to a high‑quality Loan Agreement, paired with clear priority arrangements and a maturity plan.
• If a future equity path is likely, plan now: align your note terms with later rounds (and consider how loan notes sit alongside shareholder expectations and any future Shareholders Agreement).

If you’d like tailored help drafting a secured note package, setting up the security, or checking your financial promotions, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.