Give a Business Loan to Family or Friends Using a Promissory Note

What you will discover:

Promissory notes are used for what?
How can I write a promissory note to a friend or family member in order to lend them money?
Is interest included in a promissory note?
What causes a promissory note to be void?

Many people are taking advantage of the pandemic’s uncertainty to launch their dream businesses. While banks may be eager to lend money, some new business owners are seeking funding from friends and family.

Even if you believe money will never be a problem in your position, it may build a schism between loved ones. If you are thinking of lending money to a friend or family member, you need take precautions to safeguard your financial interests. One method is to use a promissory note to record the borrowing conditions.

Promissory notes are used for what?

A promissory note is sometimes known as a “note payable.” It is a financial instrument that specifies the conditions of a loan between two parties. It will contain all loan details, and each party will sign it to confirm that they understand and agree to the terms.

The following are common components of a promissory note:

The amount of the loan
Terms of repayment (such as a single amount or smaller installments over time)
Deadlines for repayment
The interest rate

Promissory notes are often known colloquially as “IOUs” or just a “note.”

How can I write a promissory note to a friend or family member in order to lend them money?

Promissory notes may be pretty simple. They may specify how much money you are lending and when you expect it to be returned. You may also get creative with the promissory note to create a repayment plan that suits your needs.
Payment Plans for Promissory Notes

Some promissory notes specify payback amounts due by a certain date. Others will create a repayment strategy that includes recurring payments or other stipulations. Listed below are a few instances.

Payments in installments. A promissory note with installment payments specifies the amount of money that must be paid on a regular basis, such as weekly, monthly, quarterly, or yearly. You and your friend or family member may come up with whatever payment plan you choose. Those payments are usually made until the loan is completely paid off.
On-Demand payment. A promissory note that is payable on demand has no set due date, but you (the lender) have the right to demand repayment at any time. In many cases, the lender will issue the demand, and the borrower will make arrangements to settle the loan within a certain time frame. This sort of promissory note is often used among friends and relatives since it provides for a great deal of flexibility while still giving proof that the loan was made.
Payments via Balloon. A balloon payment is a lump sum payment that usually comes after a series of monthly payments. Assume you lend money to a friend for a short period of time while they refinance their business. You anticipate that they will refinance within the next 12 months, so you arrange them a $10,000 loan with $420 monthly installments and a $5,000 balloon payment at the end. The refinancing should pay you off completely, allowing your buddy to make the greater payment at the end.

Promissory Notes Secured

A promissory note is considered “secured” when it is linked to a particular property. The most popular types of consumer secured promissory notes are car and housing loans. Secured loans in company might be attached to automobiles, equipment, real estate, and other assets.

Assume your friend wishes to purchase a new oven for her commercial bakery. You decide to lend her money so she can purchase the oven. If you want to attach the obligation to the oven, you may write a secured promissory note. If she fails on the debt, you may remove the oven and sell it to recoup some or all of your money.

Keep in mind that specific recording requirements may apply for this type of transaction. You may need to submit a notice with the secretary of state to alert other possible lenders of your interest in the oven. Consult a lawyer about the rules in your region to ensure that your rights are properly protected in such case.

Is interest included in a promissory note?

Although most formal promissory notes include interest, it is not required for a legally valid promissory note. If you do not wish to charge interest to a friend or family member, make the loan interest-free or use 0% as your interest rate.

Leaving out the phrase totally might result in interest being charged automatically in certain cases, thus it is a good idea to include an interest clause in your promissory note.

What causes a promissory note to be void?

Promissory notes are adaptable, but they must have a few key characteristics to be legally legitimate.

Names of those participating
The agreement’s terms are signed by both parties.

If you have any concerns regarding how to create a promissory note, consult with a lawyer to receive answers suited to your individual case.