updated September 1, 2023 · 8min read
Successful businesses are built on big ideas and long-range goals, but without sufficient capital, those dreams may never be realized. Limited start-up funds can stop a company in its tracks: business owners often underestimate the amount of money they will need to keep their organization running, and close their doors before they’ve had a chance to get a market foothold. Many owners also expect their companies to turn a profit on Day 1, failing to consider expenses, competition, and the time it takes to build a customer base.
Whatever the reasons, individuals and companies often must borrow money to keep their businesses afloat. They can turn either to large financial institutions or to friends, colleagues, and relatives for support. The enclosed documents may prove more useful for a company looking to borrow money from less formal sources, since commercial lenders may be reluctant to loan money to businesses without defined income streams and, moreover, will usually require businesses to use their standardized forms. Nonetheless, the sample form and instructions that follow may provide a good starting point for any person or business seeking information about loan terms and deal structures.
This package contains everything you’ll need to customize and complete your unsecured promissory note. A written note can minimize confusion, misunderstanding, and error, and clearly set forth the parties’ expectations and fulfillment obligations. In every way, this promotes a successful and profitable business arrangement.
Before sitting down to sign, decide exactly what your goals are for the note. How long is the loan for? How much will be paid each month (or other period)? What interest rates will be applicable? A good agreement is one that captures the intentions of the parties accurately. Take a moment to clarify the terms and conditions of your loan before memorializing them in written form.
Allow each party to spend some time reviewing the promissory note. This will reduce the likelihood, or at least the efficacy, of claims that a party did not understand any terms or know what their obligations were under the document.
Both parties should review the note carefully to ensure that all relevant deal points have been included. Do not assume that certain expectations or terms are agreed to if they are not stated expressly on the document.
The following form is an unsecured promissory note. If the borrower defaults on an unsecured loan, the lender must go to court to recover its money. By contrast, with a secured promissory note, the lender takes a secured interest in the borrower’s property. If the borrower defaults on the loan, the lender can seize that property almost immediately.
The enclosed document has a specific term, during which the borrower must make regular, equal payments. At the end of that term, the borrower must pay any outstanding amounts due under the note. This last payment is sometimes called a “lump-sum” or a “balloon” payment.
Choose a fair interest rate. Although the enclosed note will “rewrite” any illegal interest rate to make it legal, it’s a good idea to select a more reasonable number. This will decrease the chances of default and make for a less strained relationship between the parties.
The parties should sign only the one original document, and that original should be given to the lender. Make at least one photocopy, make sure that the document says “COPY” in bold letters, and give the copy to the borrower. After the note has been paid in full, the lender should return the original document to the borrower.
Depending on the nature of its terms, you may decide to have your note witnessed or notarized. This will limit later challenges to the validity of a party’s signature.
If your loan agreement is complicated, do not use the enclosed form. Contact an attorney to help you draft a document that will meet your specific needs.
The following provision-by-provision instructions will help you understand the terms of your unsecured promissory note.
The numbers below (e.g., Section 1, Section 2, etc.) correspond to the provisions in the note. Please review the document in its entirety before starting the step-by-step process.
by LegalZoom Staff
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