You want a small business loan and you think you'll qualify, but you've done some reseach and all the terms are starting to sound like a foreign language you've never learned. Let FindLaw help you make better sense of the loan process. Below you will find a handy glossary of typical loan documents and terminology you should be familiar with when applying for a small business loan.
Promissory note - A promissory note is a contract. When your company signs a promissory note, it promises to repay to the lender a certain amount of money, at a certain time, and according to certain terms and conditions. A promissory note may be unsecured or secured.
- If a promissory note is unsecured, the lender is looking only to your company's cash flow and profits for repayment of the loan.
- If a loan is secured, the lender still looks to your company's cash flow and profit for repayment of the loan, but if the company does not pay, the lender looks to the security or "collateral" as a secondary source of repayment.
Security agreement - A security agreement gives the lender a "security interest" in specific personal property owned by your company. That means that your company pledges that property as "collateral" for the loan. If your company does not repay the loan as required, the lender can seize the "collateral," sell it, and apply the proceeds to your loan. The lender may take "all assets" of your business (everything your company owns) as collateral. Sometimes the lender requires only certain assets as collateral, such as inventory and accounts receivable or specific vehicles or equipment.
- Personal property means all property owned by your company other than real estate.
Mortgage - A mortgage gives the lender a security interest in real property owned by your company. That means that your company pledges the real property as collateral for the loan. If your company does not repay the loan, the lender can foreclose on the real property, sell it, and apply the proceeds to your loan.
- Real property means real estate owned by your company.
Loan or credit agreement - If your company's loan is fairly large, the lender may require a loan or credit agreement. A loan agreement contains terms and conditions for your loan in addition to those contained in the promissory note, security agreement, or mortgage. Common provisions in a loan agreement include provisions regarding the lender's commitment to lend, repayment and note terms, things that must happen before the lender is obligated to advance funds, representations and warranties, agreements by the borrower to take or not take certain actions, and events of default.
Take Legal Action Now
Even though you've read this article, you likely still have legal questions about loans or mortgages to secure a small business loan. Meet with an experienced business law attorney before signing any paperwork with a bank or other lending organization.