Secured Notes: How to Raise Debt with Security

Raising money with secured notes can look straightforward on paper, but this is where founders often get caught. A business may agree on the interest rate and repayment date, then forget to sort out the security properly, fail to document what happens if the company defaults, or offer notes to investors without checking whether disclosure rules apply in New Zealand. Another common mistake is assuming a simple loan agreement is enough, when the whole point of secured notes is that the lender has enforceable rights over business assets if things go wrong.

Secured notes can be a useful way for startups and SMEs to raise debt without giving away equity, especially where investors want extra protection. But the structure only works if the note terms, security package, investor communications, company approvals and registration steps all line up. This guide explains what secured notes are, when New Zealand businesses use them, what to put in place before you sign, and the practical mistakes to avoid if you want debt funding that is clear, enforceable and commercially workable.

Overview

Secured notes are debt instruments where a business borrows money and gives the noteholder security over specified assets or a broader pool of company property. In New Zealand, the legal work usually goes beyond the note itself, because the security document, registration position, company governance and any financial markets compliance questions all affect whether the arrangement works as intended.

• Confirm exactly what the noteholder is lending, and on what repayment and interest terms.
• Decide what assets will secure the debt, and whether the security is specific or general.
• Check whether the security interest needs to be registered to protect priority.
• Make sure the company has authority under its constitution, shareholder arrangements and board approvals.
• Assess whether any disclosure or financial product rules apply to the offer.
• Review existing banking documents and investor agreements for consent, negative pledge or ranking issues.
• Set clear default, enforcement and reporting terms before you sign.

What Secured Notes Means For New Zealand Businesses

At its core, a secured note is a promise to repay borrowed money, backed by security that gives the lender extra rights if the borrower does not pay. That extra protection is the main difference between secured notes and unsecured loans or ordinary notes.

For a New Zealand company, secured notes usually sit at the intersection of contract law, company law, personal property security rules and, in some cases, financial markets regulation. The commercial appeal is obvious. Investors may be more willing to lend if they have security, and the company may be able to raise funds without issuing shares and diluting existing owners.

What a secured note normally includes

The note terms need to state the commercial deal clearly. That usually includes more than just the amount borrowed.

• Principal amount.
• Interest rate, and whether it is fixed, floating or contingent.
• Repayment date, instalments or conversion mechanics if relevant.
• Events of default, such as non-payment, insolvency or breach of other obligations.
• Investor reporting rights and any financial information covenants.
• Early repayment rights, penalties or redemption mechanics.
• Ranking, including whether the notes are first ranking, second ranking or subordinated.

The security piece may be set out in the same document or a separate security agreement or deed. What matters is that the collateral is described clearly and the noteholder's rights are enforceable.

What security means in practice

Security gives a lender rights over assets if the borrower defaults. Depending on the deal, the security may cover specific assets, such as equipment, inventory or receivables, or it may cover all present and after-acquired property of the company.

This affects real risk allocation. If the business fails, a secured creditor may rank ahead of unsecured creditors in relation to the secured assets, subject to the terms of the security, any prior-ranking interests and applicable insolvency rules.

Why founders choose secured notes

Founders usually choose secured notes when they need capital but want to avoid an immediate equity round, or when an investor is only prepared to lend if security is offered. This can happen before a major product launch, before expanding into new channels, or before spending money on setup, stock, hardware or customer acquisition.

Secured notes can also suit businesses with tangible assets or recurring revenue that lenders can underwrite more comfortably than a high-growth but pre-revenue equity story. For established SMEs, secured debt may feel more familiar than issuing shares to outside investors.

Where New Zealand compliance issues appear

The legal issues are not limited to the note wording. A New Zealand business also needs to think about internal approvals, disclosure obligations and registration of the security interest where required. The exact compliance position depends on who the investors are, how the offer is structured and whether any exemption applies.

This is also where data and privacy issues can become relevant. If you are raising from multiple investors, using an online application process, collecting identity documents, or sharing company information packs that include personal information, the Privacy Act 2020 can come into play. Businesses should be careful about what investor data they collect, why they collect it, how long they keep it, and who they disclose it to under a clear privacy policy.

When This Issue Comes Up

Secured notes usually come up when a business needs funding quickly but wants a structure that is more protective for lenders than ordinary unsecured debt. The pressure point is often timing, and rushed deals are where avoidable legal problems appear.

Common founder scenarios

A startup may have product demand and investor interest, but not enough time to run a full equity round. An SME may need working capital ahead of a seasonal push. A tech business may want a bridge facility before a larger raise. In each case, secured notes can look like a practical middle ground.

• A founder borrows from existing shareholders who want debt protection rather than more shares.
• An early-stage company raises short-term funds from sophisticated backers before a priced round.
• An established business wants to fund equipment, stock or expansion using debt secured over assets.
• A company restructures existing informal loans into a cleaner secured note programme.
• A group of investors wants standardised debt terms rather than separate bespoke loan agreements.

When existing arrangements create friction

Secured notes often raise problems where the company already has a bank facility, trade finance line or shareholder agreement. Existing finance documents may restrict further borrowing, prevent the company from granting additional security, or require lender consent before new debt is issued.

Shareholder agreements and constitutions can also matter. Some companies need shareholder approval for major financing steps. Others have pre-emption style rights, director authority limits or restrictions on issuing instruments that may convert into shares later.

When privacy and process issues matter

Privacy and process issues appear earlier than many businesses expect. If you collect investor application forms, passport or driver licence details for due diligence, bank account information for interest payments, or cap table information tied to individuals, you need a clear lawful process. The main risk is not only a privacy complaint, but messy investor administration that undermines trust.

Before you launch online, prepare sensible collection notices, secure storage practices and a clear internal process for who can access investor records. If a third-party platform, registry provider or admin contractor is involved, check the contract terms around data handling, confidentiality and incident response, including any data processing agreement requirements.

Practical Steps And Common Mistakes

The safest approach is to treat secured notes as a funding product, not just a template document. The legal result depends on how the note terms, security, approvals, registration and investor communications fit together.

1. Decide what you are really offering

Start with the commercial fundamentals before you circulate a term sheet. Businesses often rush to discuss security first, but investor expectations will also depend on term, return, ranking and repayment mechanics.

• How much money are you raising in total?
• Will there be one investor or multiple noteholders?
• Is the instrument pure debt, or does it include conversion rights?
• When is repayment due, and how realistic is that timing?
• Will interest be paid regularly or rolled up?
• Will some lenders have better rights than others?

A vague structure causes drafting problems later. It can also create misleading investor communications if the terms change after people have already committed.

2. Match the security to the business assets

The security needs to reflect what the business owns and what a lender actually expects to recover against. Founders sometimes offer security over assets that are already encumbered, hard to identify, or not commercially meaningful.

For example, a software business may have limited physical assets, so the real value might sit in receivables, contracts or intellectual property. An import business may have stock and equipment that support a more traditional security package. A services company may have little beyond bank accounts and debtor books.

Before you sign, check:

• What assets does the company actually own?
• Are any assets leased, licensed or already subject to existing security?
• Will the security cover present and after-acquired property?
• Do related entities hold key assets instead of the borrower company?
• Does the lender expect guarantees from directors or group companies?

3. Get the registration and priority position right

A secured note can lose much of its value if the lender's security is not properly protected. In practice, this usually means checking how the security interest is perfected and how priority works against other creditors.

New Zealand businesses commonly need to consider the Personal Property Securities Register position. Whether, when and how to register depends on the security arrangement and the assets involved. This is not a box-ticking exercise. A registration error, delay or mismatch between the documents and the registration can affect enforceability and ranking.

This is where founders often get caught by assumptions. They may think that signing a document automatically gives the lender first claim, or that an existing bank will simply sit behind the noteholders. Neither point should be assumed.

4. Check the company has authority to enter the deal

A financing document is only part of the picture. The company needs proper authority to issue the notes and grant the security.

Review the company's constitution, shareholder arrangements and board delegations before you sign. A typical approval process may include:

• Board resolutions approving the borrowing, security and transaction documents.
• Shareholder approvals if required by the constitution or shareholder agreement.
• Director interest disclosures where a related party is investing.
• Certificates or signing authorities confirming who can execute documents.

Related-party fundraising deserves extra care. If founders or existing directors are lending through secured notes, conflicts need to be managed properly and the process should show that the company acted in its interests.

5. Assess financial markets and disclosure rules

Not every secured note raise can be marketed casually. Debt offers can raise questions under New Zealand financial markets law, especially where offers are made to multiple investors or the public. The right approach depends on the structure, the type of investors approached, and whether an exemption applies.

Businesses should think carefully before circulating pitch decks, application forms or offer emails that describe a note issue as open to broad investor participation. The legal position can be different if the raise is limited to wholesale or otherwise exempt investors, compared with a retail-style offer.

Promotional language matters too. Statements about security, priority, returns and risk should be accurate and consistent with the legal documents. Overstating investor protection can create fair trading and misrepresentation risk, even if the issue never reaches a formal dispute.

6. Draft default and enforcement terms that work in real life

The best secured note documents say clearly what happens when things go wrong. A common drafting mistake is using generic enforcement language that does not fit the business or the investor group.

Think about founder moments that trigger tension:

• The company misses an interest payment by a few days.
• A major customer contract is terminated.
• The business wants to sell an asset covered by the security.
• The company raises another round and investors dispute ranking.
• A bank appoints a receiver before noteholders act.

The documents should deal with grace periods, notice rights, standstill arrangements, intercreditor issues where relevant, and practical enforcement steps. If there are multiple noteholders, consider who can act on behalf of the group and how decisions are made.

7. Do not ignore privacy, records and investor administration

A secured note raise often generates a lot of personal and confidential business information. Businesses sometimes focus so heavily on closing the funding that they overlook the back-end governance.

Your process should cover:

• What investor information you collect and why.
• How you notify investors about collection and use of their information.
• Where ID documents, bank details and signed forms are stored.
• Who can access investor records internally.
• How long records are retained and when they are securely deleted.
• What your team will do if information is sent to the wrong person or a system is compromised.

If you are selling online or using a digital expression-of-interest process, the website terms, privacy disclosures and application workflow should line up with the actual raise. This is especially important if an investor portal collects personal data before the offer terms are finalised.

Common mistakes to avoid

Most secured note problems are not exotic legal failures. They are practical mistakes made under time pressure.

• Using an unsecured loan template and adding a brief reference to security.
• Promising first-ranking security without checking existing lender rights.
• Skipping board and shareholder approvals.
• Assuming registration can be fixed later without risk.
• Marketing the notes too broadly before checking disclosure rules.
• Collecting investor personal information without a clear privacy process.
• Leaving ranking and enforcement issues unresolved between different creditor groups.
• Failing to align term sheets, subscription materials and final documents.

FAQs

Are secured notes the same as a normal business loan?

No. They are both debt, but secured notes are usually structured as note instruments with agreed issue terms and security rights for the noteholder. The commercial result can resemble a loan, but the documents, investor process and compliance issues may be different.

Does a New Zealand company need to register security for secured notes?

Often, registration needs to be considered carefully so the security interest is protected and priority is preserved. The exact requirement depends on the security structure and assets involved, so businesses should confirm the position before completion, not after funds are advanced.

Can secured notes be offered to multiple investors?

Yes, but that can raise extra legal issues. Once you move beyond a one-off private arrangement, disclosure, investor categorisation, standardised terms and administration all become more important.

Can secured notes convert into shares later?

They can, if the terms provide for conversion. If conversion is included, the company should also review constitution limits, shareholder arrangements, dilution effects and the way the offer is described to investors.

What documents are usually needed for secured notes?

That depends on the structure, but common documents include the note instrument or note deed, a security agreement or deed, subscription or application materials, company approvals, and any required registrations or priority arrangements. Existing finance and shareholder documents should also be reviewed.

Key Takeaways

• Secured notes let a business raise debt while giving lenders security over assets, which can make fundraising easier without immediate equity dilution.
• The legal effectiveness of secured notes depends on more than the note terms, because security, registration, ranking, approvals and disclosure all matter.
• Before you sign, check existing banking documents, shareholder arrangements and the company's authority to borrow and grant security.
• Registration and priority issues should be addressed carefully, especially where other secured creditors already exist.
• Investor communications must match the legal position, particularly around returns, security and ranking.
• If you collect investor personal information during the raise, make sure your privacy process, storage practices and contracts with service providers are fit for purpose.
• A clean secured note raise usually needs coordinated work across contracts, governance and compliance, rather than a rushed template-only approach.

If your business is dealing with secured notes and wants help with note terms, security documents, investor disclosure, company approvals, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.