Term notes: Investing in debt instruments

Term notes are a debt instrument that early-stage companies use to acquire capital to scale their businesses. In this type of agreement,  investors lend money to a company, acting as a bank. In return, the company agrees to pay investors a set amount of interest on their invested capital.

Term note agreements sidestep traditional bank loan methods by cutting out the middleman. Moreover, since investors serve as lenders, they have the potential to earn similar interest to a bank.

Key terms

Annualized interest rate: The percentage of interest that you’ll earn on your term note on an annual basis. 

Maturity date: The date by which all funds (principal and interest) are due back to investors. Sometimes repayment occurs before the Maturity Date, in which case no additional amount would be due. However, if any amount is still owed by the Maturity Date, investors would be owed repayment of the remainder due.

How do term notes work?

Example: You invested $1,000 in a term note offering on Republic.

• Annualized Interest Rate: 18%
• Maturity: 42 Months

Fixed monthly payments continue until the note is paid in full or until the deal reaches its maturity.

  Investments are not guaranteed or insured, and investors may lose some or all of the principal invested if an issuer cannot make its payments.

When do payments on term notes start?

Although this varies on a case-by-case basis, payments on term notes generally start one full calendar month after closing a successful campaign. So, for instance, if an offering closes in January, the first payment would be in March. 

  If the offering has a Startup Period, then no payments are expected, and usually, no interest accrues during this time. Check the terms section on the offering page to see the specifics of each deal.

How do term note payments work?

Term note payments work just like a mortgage or car payment. For example, if the annualized interest rate is 18%, the monthly interest rate is 1.5%.

(Monthly Interest = Annual interest of 18% divided by 12 months)

Term note payments are mapped out, so the business agrees to make the same payment every month until the maturity date.

In this example, the business would make payments of $32.26 every month for 42 months. 

Your principal balance starts with your initial investment (i.e., $1,000). Then, each month, interest is calculated by multiplying the monthly interest rate (i.e., 1.5%) by the outstanding principal remaining. 

As the business makes payments each month, a portion is applied to the interest accrued, and the remainder goes towards paying down the outstanding principal. So, as each monthly payment is made, the outstanding principal is reduced, and the next month’s interest amount is a little lower.

  The interest payment is calculated by multiplying the monthly interest rate by your outstanding principal.

  Remember, these payments are not guaranteed. The business may fail to make payments, and you may lose your entire principal.

  Republic charges an administrative fee for each payment made to you.

  Your monthly payment is partially made up of an interest payment and a principal payment.

If a business chooses to make a partial prepayment, the prepayment gets applied to your principal, but the monthly payments stay the same.

When do payments end in a term note?

Payments end when the business pays you back your outstanding principal balance.

This concludes our series on debt instruments. If you missed our first two posts, make sure to read up on convertible notes and revenue sharing notes.