Secured demand promissory note: How-to guide

Businesses can face significant capital challenges and, hence, often borrow money to maintain their operations. They may seek assistance from financial institutions, as well as from friends and family members.

A promissory note could be a valuable resource for those looking for details on loan conditions and arrangements. A written note can minimize confusion, misunderstanding, and error. It sets forth the parties’ expectations and fulfillment obligations. 

What is a secured demand promissory note?

A secured demand promissory note helps businesses easily borrow money from a lender by assigning their property as collateral under the demand note. It also states that the borrower must immediately pay the loan amount back to the lender when demanded.

Difference between a secured promissory note and an unsecured promissory note

In a secured promissory note, the lender holds a secured interest in the borrower’s property. If the borrower defaults on the loan, the lender can immediately seize that personal property. Secured promissory notes are supplemented with and supported by security agreements.

On the other hand, with unsecured promissory notes, the lender has no secured interest for the money lent. If the borrower fails to repay the loan, the lender needs to take the legal route to demand payment from the borrower.

Benefits of a secured promissory note

Borrowers who agree to sign secured notes may find loans more readily available to them. Lenders know that if a default occurs, they can sell the property used as collateral under the secured note. This protection may, in turn, make a borrower more comfortable with the loan arrangement. Nobody wants to default on a loan or force others to absorb losses on their behalf. With a secured note, you can be sure you’re not leaving lenders, who may be colleagues or other individuals close to you—out in the cold.

Steps to follow while drafting a secured demand promissory note

1. Memorialize a property’s security interest

A security interest in a property can be marked with a financing statement, called a UCC financing statement. Once a UCC financing statement is completed and filed with the correct governmental authority, the lender’s interest in the property is considered “perfected.” This means that if future lenders also seek a security interest in the same asset, the lender with the perfected interest would have top priority and could seize the property after a default.

2. Choose the right interest rate

When setting an interest rate for a loan, choosing a fair and reasonable number is essential. Even if an illegal interest rate is selected, the loan agreement will automatically adjust it to a legal one. However, selecting a more reasonable interest rate can reduce the chances of default and lead to a smoother and less strained relationship between the parties involved.

3. Review the note

Both parties should review the promissory note carefully to ensure that all important terms of the agreement have been included. This helps to avoid any misunderstandings or disputes in the future. It is also crucial not to presume anything that hasn’t been mentioned explicitly in the document.

4. Sign the note

The parties should sign only one original document, and that original should be given to the lender. You can create a photocopy of the note that says “Copy” and give it to the borrower. Once the note is fully paid, the lender should return the original note to the borrower.

Depending on the terms, you may choose to have your note witnessed or notarized to limit challenges to the signatures' validity.

If your agreement is complicated, contact an attorney to help create a document that meets your needs.

Key components in secured demand promissory notes

It’s important that these clauses, like how much will be borrowed and what interest rates will be applicable, are included in the note. A good agreement accurately captures the parties' intentions. Hence, clarify the terms and conditions of your loan before memorializing them in written form.

The following sections will help you understand the terms of your secured promissory note form.

Introduction

This section identifies the document as a promissory note. Write the effective date of the note and the details about the parties involved.

One party is called the “borrower,” who borrows the money and will pay it back to the “payee.” Note that the payee may or may not be the same entity as the lender. Under some loan agreements, the lender requires the borrower to make payments to a third party.

Payment

Herein, the borrower agrees that the borrowed amount will be repaid immediately, whenever the payee demands it.

Interest

This section mentions the total principal amount and a legally valid interest rate. The payee can add details of where and how the money must be repaid.

Prepayment

This section explains that the borrower can pay the lender before the maturity date or before it is specifically demanded and that there is no penalty for doing so.

Security for payment

This clause ensures the borrower’s repayment by listing specific property as collateral. Because this note contemplates the simultaneous signing of a security agreement, the details of the collateral arrangement can be general. A security agreement should provide more information on the collateral pledged.

Events of default

In this section, list the occasions on which the payee can declare that a default has occurred under the loan. You can also define the period before which the borrower has to repay the amount once the demand is made.

Acceleration; remedies on default

This section mentions the actions that the payee can take when an event of default occurs.

Waiver of presentment; demand

This clause indicates that when an event of default occurs, the payee can take action without providing further notice or any explanation to the borrower.

Governing law

This part allows the parties to choose the state law that’ll be used to interpret the note.

Collection costs and attorney’s fees

In this section, the borrower accepts the responsibility of paying any expenses for collecting money or attorney’s fees under the note.

Successors and assigns

This section clarifies that the parties' rights and obligations will be transferred to their heirs in the event of death. Similarly, in the case of business transfer, these rights and obligations will be passed on to successor organizations.

Severability

This clause protects the terms of the note as a whole, even if one part is later invalidated.

Notice

This section outlines the mailing addresses of the borrower and the payee for official and legal correspondence.

No implied waiver

This section explains that even if the payee ignores or allows the borrower to break an obligation under the note, it doesn’t mean the payee waives future rights to require the borrower to fulfill those obligations.

Entire agreement

This section mentions that the signed agreement is final and it is “the agreement” about the promissory note.

Headings

This part clarifies that the titles appearing at the start of each section are intended to arrange the document and shouldn’t be regarded as functional components of the note.

Frequently asked questions

What is a secured promissory note?

Not all businesses turn a profit the first day their doors open. Some owners need a loan to keep the lights on long enough to stay afloat. However, big financial institutions can be unwilling to take a chance on new, small businesses. This is where friends and family come in and where a promissory note is helpful. Adding collateral to make it a secured promissory note can help motivate lenders or ease any initial reluctance.

Can a promissory note be on demand?

Yes, a promissory note can be on demand. It means that the borrower must immediately repay the loan to the lender when they demand it.

Here's the information you'll need to have handy to complete your secured demand promissory note:

• Who the lender is: Have the name and contact information of the lender or payee ready
• Who the borrower is: Have the borrower’s information available
• Who the holder is: The holder might be the lender or a third party