What documents must I have when lending money to a company?
Instead of investing in shares of a company, you can also invest in a loan to the company. Loans and shares are fundamentally different (please reference Legal Small Talk #30). A loan investment must have loan documents. At the very minimum there must be a promissory note. Only a note can prove that the money is for a loan, rather than a share purchase or a gift. The promissory note should include who the lender is, who the borrower is, the principal amount, the interest rate, the loan start date and the maturity date. If the borrow did not pay back the money, the lender with a promissory note can sue the borrower in court and will likely win the case swiftly. It is difficult to file a lawsuit without at least a promissory note. In addition, if the borrower is a company, the loan has to be approved by its board of directors. Accordingly, the board resolution approving the loan is needed. These two are the most basic loan documents.