Unsecured Note
Candlefocus EditorUnsecured notes offer the issuer flexibility and limited disclosure requirements, although investors may not have the same protections found with debt offerings registered with the SEC. Companies typically prefer unsecured notes as a source of finance as these options generally involve fewer restrictions for the company than other sources of finance such as issuing equity, which involves diluting the ownership of existing shareholders.
Unsecured notes may also have a maturity date at the point when the notes must be repaid. Alternatively, they may be perpetual, so no refund is due to investors, with interest and dividends paid semi-annually.
Unsecured note holders remain unsecured creditors, ranking ahead of shareholders, but behind banks and other secured creditors. Therefore, if a company becomes insolvent, the principal may be reduced or partially written off before any payments are made to stakeholders with higher priority.
Unsecured notes are often offered in privates placements, meaning they are only available to qualified investors such as individuals who are accredited investors with a net worth over one million dollars and institutional investors like private equity companies and venture capitalists.
Overall, unsecured notes offer an attractive source of capital to companies, which often have more flexibility and less costly disclosure compared to other financing options, although the higher interest yields for investors come with increased risk.