Private Investor Loans
Although much of our articles
have focused on bank and finance company issued loans, this next article will
focus on the issues that come with obtaining a loan from a private individual.
For many small business owners, entrepreneurs from time to time, will look for a
business loan privately rather than going to a financial institution. However,
you should be aware that the interest rates associated with these loans often
carry a higher interest rate (assuming that the transaction is “arms-length”).
More often than that not
private investor loans are often referred to as promissory notes. This, much
like any other business loan agreement, is a contract between you and a lender.
This term is also often used among borrowers that do approach lending
institutions for their debt capital needs. When negotiating with a potential
private investor for a business loan – you absolutely must make clear that what
you are seeking to obtain is a business loan. In some instances, there have been
issues where private investors who provide debt capital believe that they are
receiving a percentage of the business rather than simply an interest payment on
the outstanding principal balance. As such, and as with any business agreement,
have a clear and decisive contract that clearly showcases how much money you are
borrowing, the fact that you are borrowing the money rather than selling a
percentage of your business, the term of the loan, and the interest rate that
will be applied to the loan. It is also maybe very helpful for you to have a
full business loan amortization schedule built into the promissory note contract
so that it is even more clear that this is in fact a loan rather than an equity
investment.
If you are having issues
drafting a promissory note then it is imperative that you speak to an attorney
that can assist you in this process. Even if you are very well versed in
contracts, it is still highly advisable that you seek appropriate legal advice
when developing a contract with a private investor who is providing you with
debt or equity capital.