Understanding Promissory Notes When Forming an LLC
If you borrow start up cash when forming an LLC there are several ways to structure the repayment. A promissory note outlines the repayment terms of your loan. You will automatically be required to sign a promissory note when you borrow money from a commercial lender to form an LLC. But, it is also a good idea to sign a promissory note if you borrow money from friends or family. You want to avoid any confusion later about the terms of the money whether it was a gift or a loan, how and when it must be repaid and the rate of interest on the loan. There are several types of repayment plans, pick the one that is right for you.
You might consider an amortized payment plan when you borrow cash for forming an LLC. The benefit of an amortized plan is you pay the same amount every month (or year). Part of each payment goes to the interest and part to the principal amount. As long as you have paid the correct amount and paid on time, your loan is completely paid off with your final payment. A printed amortization from the lender or an online amortization schedule can help you determine the amount of payments required to satisfy the loan.
For some small business owners forming an LLC, the lower payments of a “balloon” payment loan is appealing. With this type of loan, you will make either equal monthly payments or interest only payments over a number of months or years. At the end of the loan term you must make a final balloon payment for the remaining balance. If you use this type of loan to form an LLC, enjoy the lower monthly payments but be sure to plan for that large balloon payment that awaits you.
Friends or family members may be the best option for short terms loans when you form an LLC. The interest rate may be better than what you can get from a commercial lender and your payment schedule may be more flexible.
Many small business owners need to borrow cash when forming an LLC. Understanding the terms of your repayment plan is the key to determining which repayment option to choose. Read carefully, promissory notes can be full of legalese. Last but not least, craft a solid plan to ensure you are able to repay the loan according to the terms.
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