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What is the Purpose of Business Promissory Notes?

According to the US Small Business Administration, around 73 percent of companies with less than 500 employees rely on a range of financing options to fund their operations. Florida business owners and stakeholders may opt for traditional loan structures, as well as credit cards, lines of credit, angel investors, and many others. One popular alternative in recent years has been the usage of loans secured by a business promissory note, especially for new startups. This document memorializes the financing arrangement and describes the borrower’s obligations regarding repayment.

There are multiple advantages to using a business promissory note in connection with a loan, but it’s critical to understand exactly how these instruments work. A Clearwater business formation lawyer can provide additional details, but an overview may be helpful.

 Common Scenarios for Using a Business Promissory Note:

If you’re borrowing from a commercial lender, you’ll likely be required to sign a promissory note as part of the loan transaction. However, you should also create one any time you’re borrowing from a friend, relative, or business entity that’s separate from your own.

Having documentation regarding the loan can stave off misunderstandings, which is important when you’re dealing with someone you know personally. A business promissory note makes your obligations official and clarifies that the funds are not a gift. Plus, it’s important to have the note on your company’s books for recordkeeping purposes.

Essential Components of a Promissory Note:

The key elements in a business promissory note include:

  • Identification of the lender and borrower;
  • A statement of the amount of the loan;
  • The payment terms;
  • Interest; and,
  • Legal remedies in the event of default.

Types of Payment Arrangements:

A business promissory note can be flexible in terms of how you repay the loan, but the important issue is opting for a plan that works for your business. You might consider one of the most common repayment plans, which are:

  • Amortized Payments: You may a designated amount on a periodic basis for a number of months or years. The funds go toward interest and principal, making an amortized plan similar to a car loan or home mortgage.
  • Monthly Payments Plus a Balloon: This arrangement requires you to installment payments for a designated period; after the final installment, you’re required to pay all remaining interest and principal at one time. A variation on this plan might be paying interest-only installments, followed by a balloon payment of the remaining balance.
  • Single Repayment of Entire Loan Amount: You can agree to make one payment of the full amount, including interest and principal at some point in the future.

Get Essential Legal Information from a Clearwater Business Formation Attorney

If you’re a Florida business owner seeking sources of funding, a promissory note may be a good fit for your situation. However, it’s important to fully understand your legal obligations and the consequences for failing to meet them. For more information, please contact Clearwater Business Law at (727) 785-5100 to set up a consultation with an experienced lawyer. Our firm advises clients throughout Pinellas County in a wide array of business law matters, including legal issues involved with promissory notes.