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Created by FindLaw's team of legal writers and editors | Last reviewed July 25, 2022
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Promissory notes are simply documents that record a promise to pay back money that you've been loaned at a certain interest rate over a set period of time. There are many ways to structure promissory notes, and each one has its advantages and disadvantages. To figure out which form of promissory note will work best for you, it pays to learn more about each type and how it can help and hurt your business.
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The bottom line is that you should always reduce any loan down to writing in the form of a promissory note. It doesn't matter if the loan comes from a bank or your best friend, it's important to get it in writing to avoid any misunderstandings and to protect yourself in case you are audited by the IRS.
Banks will provide their own promissory note, but if you are getting a loan from a family member or friend, you need to use promissory forms provided by self-help books or software that that comply with the law in your state. Here are four basic ways to structure a repayment schedule on a promissory note:
Many people who take out loans, even otherwise savvy business people, can sometimes be surprised by what they find in the fine print of a promissory note. Even if a loan package seems like a good deal, take the time to really read the fine print and discuss anything you don't understand with an attorney. A common example of the kind of "surprise" that many business owners discover when they read the fine print is that many promissory notes apply a penalty if the debtor tries to pay off the loan early.
If you are thinking of borrowing money for your new business, know the laws and be sure you are clear about how promissory notes work. If you have questions, contact a skilled business law attorney in your area who can help guide you through the loan process.
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