Do you need to raise money to start or expand your business? Find out how to do this with a secured promissory note.
updated December 8, 2023 · 4min read
Raising funds to start or expand a business can be challenging. One way many businesses raise capital is with a secured promissory note. The source of the funds can be either a commercial lender or an individual, such as a friend or family member.
Understanding promissory notes requires knowledge of certain terms:
There are several ways by which a promissory note can be paid:
Your individual circumstances will determine which of these three payment arrangements is best for your promissory note.
One option is to obtain a loan from a commercial lender, such as a bank. The lender will require you to sign a promissory note, as well as a security document. If the note is secured by real property, the security document will be a mortgage or deed of trust. If the note is secured by personal property, it will be a security agreement.
For a sole proprietor or a partnership, the owner or partners will be personally liable for the loan. For a corporation or LLC, the lender may require the owner or owners of the business to personally guarantee the loan, which will defeat the limitation of liability normally afforded by these business structures. Such a loan may be secured by property owned by the business, or by property owned personally by the business owners.
Another way to obtain capital for your business is by borrowing money from friends or relatives. This type of transaction also should be formalized with a promissory note. Often, such a personal loan is not secured by property, but securing it can be a way to give assurance to your friends and relatives that they will be repaid.
Caution must be used if you will be seeking personal loans in the name of your business, as this may bring federal and state securities laws into play. Securities laws are complicated, so consulting with a securities attorney is advised.
If you arrange a commercial loan, the lender will provide the necessary forms. But, for a personal loan, you will need to create your own promissory note.
by Edward A. Haman, Esq.
Edward A. Haman is a freelance writer, who is the author of numerous self-help legal books. He has practiced law in H...
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