Knowledge
Two terms for debt in a buyout structure — what actually distinguishes them, and why UK deal teams reach for one word or the other.
Last updated 4 July 2026
In brief: Shareholder loans and loan notes are both interest-bearing debt instruments used in the institutional strip of a buyout. The difference is mostly one of legal form and terminology: a loan note is a formal, certificated (often transferable) instrument constituted by a loan note instrument, while "shareholder loan" describes any debt advanced by a shareholder. In the UK the choice also turns on tax — in particular whether the note is a qualifying corporate bond (QCB).
In practice, deal teams use "loan note", "loan stock", "PIK note" and "shareholder loan" loosely, and the same economic instrument might be called different things by the tax adviser, the lawyer and the fund administrator. The underlying purpose is the same as any shareholder loan: to inject investor capital as debt rather than equity, so it ranks ahead of the ordinary shares and returns a fixed rate.
A shareholder loan is, at its simplest, money lent to the company by one of its shareholders. It may be documented by nothing more than a loan agreement. It carries interest — frequently PIK, capitalising rather than paying cash — and sits in the debt layer of the structure, senior to the ordinary and preference shares in the group's internal ranking.
A loan note is a more formal instrument. It is constituted by a loan note instrument (a deed), issued in denominations, and evidenced by certificates. That formality makes loan notes more readily transferable — they can be assigned between holders, which matters when co-investors or managers come and go — and allows a single instrument to govern many holders on identical terms.
| Feature | Shareholder loan | Loan note |
|---|---|---|
| Legal form | Loan agreement | Loan note instrument + certificates |
| Transferability | By assignment; less standardised | Designed to be transferable |
| Multiple holders | Usually one lender per loan | One instrument, many noteholders |
| Interest | Fixed, often PIK | Fixed, often PIK |
| Ranking | Debt — ahead of shares | Debt — ahead of shares |
In the UK, the most consequential distinction for loan notes is whether they are qualifying corporate bonds (QCBs) or not. The classification affects how gains are treated for tax when the notes are issued (for example on a rollover) and when they are later redeemed. Non-QCB status is often deliberately engineered so that management can defer a gain by rolling into loan notes rather than taking cash. The mechanics are jurisdiction- and fact-specific and always driven by tax advice — but the point for anyone maintaining the register is that the label carries real economic consequences.
Whatever the label, the accrual is the same. Loan note or shareholder loan, the instrument accrues interest on a defined day-count basis and — if it is PIK — compounds into its own principal. The cap table cares about the cash flows, not the nomenclature.
For the person maintaining the capitalisation record, the distinction between a loan note and a shareholder loan is mostly about how the instrument is documented and transferred, not how it accrues. Both are debt instruments with a principal, a rate, a day-count basis and a compounding convention — exactly the parameters an interest calculation needs. Modelling each as an instrument class with its own terms, independent of what it is called, keeps the accrual correct and the register consistent across the structure.