Loan Notes in Australia 2026: A Practical Guide for Borrowers and Investors

A loan note is a formal, written agreement where one party (the borrower) promises to repay a sum of money to another (the lender), usually with interest and over a set period. Loan notes are used in a variety of contexts, including business finance, property development, and peer-to-peer lending. They provide a way to structure private loans with terms that can be more flexible than those offered by banks.

Key features of loan notes:

• Term and Repayment: Loan notes typically have a fixed term, which can range from several months to a few years. Repayment schedules are set out in advance.
• Interest Rate: The interest rate may be fixed or variable. Rates are often higher than those of standard bank loans, reflecting the risk profile of the borrower or project.
• Security: Some loan notes are secured by assets, while others are unsecured. Secured notes offer lenders more protection if the borrower defaults.
• Transferability: Certain loan notes can be transferred or traded, providing liquidity for investors. However, not all loan notes are easily transferable.

The regulatory environment for loan notes in Australia has evolved in response to their growing popularity. In late 2024 and into 2026, updates from the Australian Securities & Investments Commission (ASIC) and the Treasury have focused on improving transparency and investor protection.

Key regulatory updates include:

• Enhanced Disclosure: Issuers of loan notes are now required to provide clearer information about risks and past performance, particularly when offering notes through online platforms.
• Taxation Clarity: Recent changes have clarified how interest income from loan notes is taxed. For most individuals, interest is treated as regular income and taxed at their marginal rate. Self-managed super funds (SMSFs) may be eligible for concessional tax treatment, depending on their circumstances.
• Investor Access: While some restrictions remain for high-risk loan notes, new categories have been introduced to allow more experienced retail investors to participate, with additional safeguards in place.

These changes aim to make loan notes more accessible while ensuring that investors are better informed about the risks involved.

Loan notes are used by a range of borrowers and investors, each with their own objectives and risk profiles.

For Businesses

Small and medium-sized enterprises (SMEs) often use loan notes to raise capital for growth, working capital, or specific projects. Unlike equity funding, loan notes allow business owners to access funds without giving up ownership or control.

For Property Developers

Property developers may issue loan notes to bridge funding gaps or to pre-fund projects. Investors are often attracted to these notes by the potential for higher returns, especially when the notes are secured against property assets. Mortgage brokers can play a role in structuring these arrangements (learn more).

For Investors

Investors, including individuals and SMSFs, use loan notes to diversify their portfolios and access fixed-income returns. Some platforms offer fractionalised loan notes, allowing investors to spread their risk across multiple borrowers or projects. Peer-to-peer lending platforms have also made it easier for everyday Australians to participate in loan note investments.

While loan notes can offer attractive returns and flexibility, they also come with risks that both borrowers and investors should understand.

For Investors

• Credit Risk: The risk that the borrower may not be able to repay the loan. This risk is higher with unsecured or subordinated notes.
• Ranking: In the event of borrower insolvency, the ranking of the loan note (senior or subordinated) affects how likely investors are to recover their funds.
• Liquidity: Not all loan notes can be easily sold or transferred before maturity, which may limit access to funds if circumstances change.
• Early Repayment or Conversion: Some loan notes include clauses that allow for early repayment or conversion to equity, which can affect the expected return.
• Tax Implications: Interest income is generally taxable, and investors should consider how this fits with their overall tax situation.

For Borrowers

• Repayment Obligations: Failing to meet repayment terms can result in penalties, loss of assets (if the note is secured), or even loss of business control if the note includes a conversion feature.
• Cost of Capital: Interest rates on loan notes are often higher than traditional bank loans, reflecting the risk to lenders.
• Disclosure Requirements: New regulations require more detailed disclosure, which can increase the administrative burden for issuers.

Whether you are considering issuing or investing in a loan note, it’s important to take a careful, informed approach:

1. Assess the Issuer or Borrower: Review their financial health, track record, and the purpose of the loan.
2. Understand the Terms: Read the loan note agreement carefully, paying attention to interest rates, repayment schedules, security, and any special features like conversion or early repayment clauses.
3. Consider the Risks: Evaluate the risk of default, the ranking of the note, and your own risk tolerance.
4. Seek Professional Advice: Consider consulting a financial adviser, accountant, or legal professional before making significant commitments.
5. Factor in Taxation: Understand how interest income or borrowing costs will affect your tax position.

Loan notes are set to play a larger role in Australia’s finance ecosystem in 2026 and beyond. Regulatory improvements are making them more transparent and accessible, while businesses and investors continue to seek alternatives to traditional lending and investment products. As with any financial product, success depends on understanding the terms, assessing the risks, and making informed decisions.

What is the main advantage of a loan note for businesses?

Loan notes allow businesses to raise funds without giving up ownership or control, and can offer more flexible terms than traditional bank loans.

Are loan notes safe for investors?

Loan notes carry risks, including the possibility of borrower default. The level of risk depends on factors such as whether the note is secured, the borrower’s financial health, and the terms of the note.

How are loan notes taxed in Australia?

Generally, interest earned from loan notes is treated as regular income and taxed at the investor’s marginal tax rate. Tax treatment may differ for SMSFs or other entities.

Can I sell a loan note before it matures?

Some loan notes are transferable or tradeable, but many are not. It’s important to check the terms of the specific loan note before investing.