Financing my startup: 3 mechanisms not to be confused with!

In this previous article, we explain the advantages of the convertible loan and the reasons for using this financing method. Of course, there are other financing methods. In this article, we introduce you to these alternatives and explain how they differ from the convertible loan.

Convertible loan <-> Bank loan

A bank loan has the advantage of being cheaper than a convertible loan (interest rate). Unlike a convertible loan, it is not subordinated to the company’s other debts. It is generally guaranteed by a significant security, in the form of a pledge on the business, unless it is guaranteed (in whole or in part) by a regional, national or European fund as part of a specific programme. Bank loans are never convertible into shares and are therefore non-dilutive (i.e. they do not dilute shareholders’ equity by issuing new shares). Ideally, the two types of loans should be combined. As convertible loans are considered quasi-equity by banks, they may open up access to bank loans as part of programmes offering guarantees to banks. Indeed, convertible loans have characteristics similar to equity because of the low probability of having to be repaid and their subordinated nature.

Convertible loan <-> Convertible bond

A convertible bond is essentially a convertible loan represented by a negotiable debt instrument, governed by the companies and associations Code, unlike a convertible loan which is purely contractual. Some professional lenders may require the creation of convertible bonds to secure the conversion of their debt. However, this involves a fairly heavy legal burden (extraordinary general meeting before a notary), whereas the purpose of a convertible loan is generally to avoid such red tape and waste of time and money.

Convertible Loan <-> SAFE

A « Simple Agreement for Future Equity » (SAFE) is essentially a deferred contribution that is not debt. A SAFE encompasses many of the same key characteristics as convertible debt. However, in a SAFE, instead of lending money, the investor buys the right to subscribe to shares at a later date for a set amount, paid in full in advance. This financing solution, developed in the United States and France, has rapidly gained in popularity due to its simplicity. Unfortunately, while the mechanism is possible under Belgian law, this simplicity cannot be replicated. Although the convertible loan is considered ‘quasi-equity’ by financial institutions, it remains a debt under Belgian accounting law. It will therefore not enable the company to ‘clean up its balance sheet’ as an investment in shares or a SAFE would.