What this form is for
A Promissory Note is used when your business borrows money and needs to document the repayment promise in legally enforceable terms. Lenders require this before releasing funds, and you'll sign it as the borrower committing to specific payment amounts, interest rates, and deadlines.
Before you start
- Loan amount you're requesting and the exact disbursement date
- Annual interest rate agreed upon with the lender (California has no usury cap for business loans, but verify if you're a consumer)
- Repayment schedule details: monthly payment amount, number of payments, and final maturity date
- Legal business name, entity type, and principal address as registered with California Secretary of State
- Contact information and legal name of the lender or financial institution
Step-by-step
1. Fill in the date you're executing the note and the city within California where you're signing.
2. Enter the principal loan amount in both numerals and written-out words to prevent disputes. These must match exactly.
3. Identify the borrower (your business legal name) and lender with full legal names and addresses. If you're signing personally as guarantor, include your individual name as well.
4. Specify the annual interest rate as a percentage. Note whether interest is simple or compounding and the calculation method (daily, monthly).
5. Detail the payment schedule: amount of each installment, payment frequency (monthly is standard), due date of first payment, and total number of payments until the loan matures.
6. State the final maturity date when the entire remaining balance becomes due. California law requires this date to be clearly stated.
7. Complete the prepayment clause indicating whether you can pay off the loan early without penalty. Many California lenders allow this for commercial notes.
8. Fill in late payment terms: grace period (if any), late fee amount or percentage, and the default interest rate if payments are missed.
9. Document the default and acceleration terms, which allow the lender to demand full immediate repayment if you breach conditions like missing multiple payments.
10. Sign and date in the borrower signature area. If required, have the document notarized (California doesn't mandate notarization for promissory notes, but some lenders require it).
What lenders look for
- Banks scrutinize consistency between your promissory note terms and other loan documents like the loan agreement or security agreement. Mismatched interest rates or payment amounts raise red flags and delay approval.
- Avoid handwritten changes or cross-outs after printing. These create doubt about agreement between parties and may invalidate the note under California Commercial Code provisions.
- Ensure your debt-to-income calculations account for this new payment obligation. Lenders verify that adding this promissory note commitment won't push your debt service coverage ratio below their threshold, typically 1.25 or higher.