The 2 primary documents you should have borrowers sign

On Behalf of | Apr 7, 2020 | Business Contracts and Leases

Most every Cincinnati business that offers a service or product has to enter into a contract at some point. Many Ohio companies draft these agreements to make sure that they get repaid for the inventory, equipment or service that they’re about to lend out or perform. Two of the primary documents that every company should have their customers sign are a promissory note and a security agreement. Businesses often draft promissory notes when they’re extending a loan to a customer. This legally-binding financial document can either be secured or unsecured. A secured promissory note is what a business drafts when they’re requiring a customer to put up collateral to receive a loan from them. In this instance, a company may offer up their accounts receivable, inventory or business equipment as collateral to be able to borrow from you. If you aren’t requiring your customer to put up collateral to borrow from you, then you generally only need to have them sign an unsecured promissory note. The downside to entering into one of these with a customer is that if they default on the loan, then the only recourse you generally have available to you to pursue to recover what you’re owed is a lawsuit. A secured promissory note is almost always accompanied by a security agreement. The former generally contains a brief description of the collateral that the borrower has put up to secure the loan. The secured promissory note often advises the security reviewer to consult the security agreement for additional details about the transaction. Security agreements go into more detail about what type of business assets were turned over as collateral for the loan. This legally-binding document also describes what happens if a borrower defaults once the repayment period has begun. Security agreements are often written to allow lenders to demand that borrowers turn over collateral to them. They may also be written to permit businesses to take such items by force themselves. Verbal agreements are virtually obsolete. An increasing number of companies have tried to steer clear of extending unsecured loans in recent years too due to limited enforceability concerns. An attorney can help you and your Cincinnati business draft a promissory note and security agreement that will protect your Ohio company’s best interests so that you don’t end up with the short end of the stick.