Promissory Notes and Repaying Loans

Borrowing money can feel good when motivated by the goal of starting your own business. The lingering anxiety belongs to the question of repayment. A business attorney will help you understand the ins and outs of the various repayment plans. Those terms are set when you sign a promissory note.

What Is A Promissory Note?

A promissory note structures repayment of a business loan. Commercial lenders will require you to sign a promissory note if you borrow your start-up cash from them. However, even if you borrow from a friend or relative, a promissory note is still a good idea. There is no harm in documenting a loan. Plenty of questions are answered in advance. Is the money a loan or a gift? When does it need to be repaid? How much interest is owed? A promissory note will clear up any misunderstandings. Even if the IRS comes snooping around with a business audit, the terms of the loan will be documented.

What Are the Different Repayment Plans?

First, you must obtain a promissory note. Banks provide their own. They are also available from form books or software, if you borrow from a friend or relative. The legal and practical terms vary considerably, which is where your attorney will be of assistance. The most important thing is to pick the right repayment plan for your business.

• Amortized Payments – You pay the same amount on a monthly or yearly basis, for a specified number of months or years. Part of each payment goes toward interest. The rest goes toward the principal. The loan and interest are fully paid once you make the last payment. This type of repayment schedule is like paying off a car loan or a mortgage.
• Equal Monthly Payments and a Final Balloon Payment – You make equal monthly payments of principal and interest for a relatively short period of time. After the last installment payment, you pay a final "balloon payment," which is one large payment that includes the remaining principal and interest.
• Interest-Only Payments and a Final Balloon Payment – You repay the lender by making regular payments of only interest over several months or years. The principal does not decrease. Instead, you pay that principal along with any remaining interest, in a balloon payment.
• Single Payment of Principal and Interest - There is always the option of paying off the loan all at once. You can specify that future date. It will include the entire principal amount and the accrued interest.

Promissory notes from commercial lenders are notorious for containing dense legalese, usually with mention of the legal rights you may or may not have to give up. Contact us today if you have any questions.