Can You Use Promissory Notes to Fund Your Business?
Businesses often need access to capital — especially when they are just starting out. In Florida, there are a number of different methods that companies can use to obtain financing. One of the most straightforward and efficient financing options for small and mid-sized firms are called promissory notes. Here, our West Palm Beach business litigation lawyers explain some of the key things that business owners need to know about using promissory notes to finance their company.
What is a Business Promissory Note?
At its core, a promissory note is simply a contract that sets the terms for and enforces a loan. Often, these are relatively basic agreements. Indeed, with small companies and startup firms, many business owners often seek initial financing through a promissory note that was offered by a friend or family member. Still, it is crucial to remember that promissory notes are serious legal contracts — they are enforceable loans.
What Terms Should Be Included in a Promissory Note?
Under Florida law, promissory notes do not have to be formal to be legally enforceable. In fact, even a loan agreement sloppily written on the back of a napkin could potentially be enforced. Of course, that is not the best way to do business. Promissory notes should be professionally drafted and carefully reviewed. Among other things, a promissory note should include the following key terms:
- The names of all parties involved;
- How much is being borrowed;
- How much will be repaid;
- The date/amount of payments;
- A description of the interest rate; and
- An explanation of what happens if there is a late payment;
- The collateral for the loan, or lack thereof;
- The time and place the agreement was made; and
- The signatures of all parties involved.
Five Important Mistakes You Need to Avoid
Although issuing a promissory note can be one of the easiest and most effective ways to raise capital, it is also possible that things could go wrong. It is imperative that business owners issuing promissory notes take the proper steps to protect the personal rights and the interests of their company. More specifically, you should be sure to avoid the following five mistakes:
- Issuing a sloppily drafted or incomplete promissory note;
- Borrowing money in an unsustainable manner, causing a likely default on payments in the near future;
- Making a material misrepresentation to lenders that could lead to a fraud claim;
- Issuing a note in a manner that unintentionally exposes your personal assets in the event of a default; and
- Soliciting a promissory note investment in a manner that violates state or federal securities regulations.
Discuss Your Case With Our Florida Business Law Attorney Today
At Pike & Lustig, LLP, our Florida business lawyers represent companies and startups dealing with the full range of financing issues. If you have questions about promissory notes or raising capital in general, we can help you get answers. To set up a confidential initial consultation, please call us at our Miami law office or our West Palm Beach law office right away.