What documents must I have when lending money to a company?https://jhwbizlaw.com/wp-content/themes/movedo/images/empty/thumbnail.jpg150150Jiang Hong Wilkin Business LawJiang Hong Wilkin Business Law//jhwbizlaw.com/wp-content/uploads/2020/07/jhw-logo.png
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.
What is the difference between secured loan and unsecured loanhttps://jhwbizlaw.com/wp-content/themes/movedo/images/empty/thumbnail.jpg150150Jiang Hong Wilkin Business LawJiang Hong Wilkin Business Law//jhwbizlaw.com/wp-content/uploads/2020/07/jhw-logo.png
There are two kinds of loans: secured loans and unsecured loans. In a secured loan, the borrower pledges its assets as collateral/security for the loan. If the borrower cannot pay back the loan, the lender can take over the assets. A bank mortgage is a typical secured loan. The real property is the pledged asset. If the borrower does not pay back the loan, the bank can sell the real property to get the money back. There is no secured asset for an unsecured loan. If the borrower cannot pay back the loan, the lender can force the borrower into bankruptcy. Even in a bankruptcy proceeding, the secured assets cannot be touched. Only a secured party is entitled to deal with the secured assets. In addition, the money owed to the government (such as HST, source deduction on employees’ salary, etc.) has to be paid first. The unsecured creditors can be paid if there are still remaining assets. Therefore, the unsecured loan is more risky than a secured loan, and the interest rate of an unsecured loan is typically higher than a secured loan.