At some point, almost every small business borrows money to either start, expand or otherwise manage its operations. When that time comes for you, it’s smart to understand as much as possible about the loan papers — or promissory notes — you will need to sign.
Here’s what you should know about these very important contracts.
What are promissory notes?
A promissory note is a document that lenders have borrowers sign before extending them a loan. It serves as your formal contract in which the lender states the terms of your loan and repayment, including interest rates and other vital information. It also states the penalties for failing to repay.
Lenders often ask their borrowers to put up hard collateral, such as their business equipment, inventory or accounts receivable, before having their prospective borrowers sign a secured promissory note. This secures the loan in case the lender defaults on payments.
Some lenders do offer unsecured loans. However, many don’t do this because it puts them in a financially vulnerable position if their borrower defaults. They’d have to invest significant resources on collections if this happened — which may not even be successful.
What’s the connection between a security agreement and promissory notes?
You should expect any lender who presents you with a secured promissory note also to ask you to sign a security agreement. The latter generally describes the collateral a borrower puts up when securing the loan and what will happen if a borrower fails to repay what they owe. The security agreement also details how a lender can recover any collateral should a default occur.
Why you have an attorney review any legal agreements before you sign them
Many lenders have standard contracts promissory notes and security agreements on hand that they’ll have their borrowers sign. Most of these contracts aim to protect a lender’s rights and financial future without regard for the borrower’s. That makes you vulnerable.
Many Murrysville small business owners operate on such a limited budget that they wouldn’t be able to survive if they became victim to a predatory lending scheme. Don’t take chances. Have a business law attorney review any contract before you sign it to ensure that it protects your interests and that it will stand up in a Pennsylvania court of law.