It is a common practice for a new company to take out a loan in order to acquire the startup funds necessary to build the company and conduct business. Although there are several avenues from which a company can acquire funding, many times smaller businesses call upon private lenders and even friends and family to acquire their startup loan. When this occurs, the parties usually formalize the loan through the use of a promissory note.
A promissory note or promissory letter generally has several main elements that it contains in order for it to act as a legally binding document. The agreement usually contains the following information:
Even the most informal loan between friends becomes a legally binding contract if both parties enter into a signed legal promissory note.
While most individuals and businesses that take out a loan through the use of a promissory note do not intend on defaulting on their promise, there are situations that can arise that might lead to an unintentional breach of contract. If a promissory note repayment schedule cannot be kept for whatever reason, the question of how this breach can affect an individual’s credit rating comes into question. That, of course, depends upon who is actually holding the promissory note.
A legal promissory note is similar to any other contract in which a borrower promises to repay a borrowed amount. Mortgages, credit card contracts, and any other borrowing agreement have the same effect and consequences as a promissory note. A promissory note default can affect a borrower’s credit rating if the promissory note holder has the ability to report the deficiency to the various credit reporting agencies. It is an involved process to become registered and certified as a member capable of reporting to the credit agencies, so generally only formal lending institutions and investment firms have the ability to report negative information on an individual's or company’s credit report.
If the promissory note holder is an individual and does not have access to the credit reporting agencies, they still have the ability to affect an individual’s credit rating if there is a default on the promissory note. The holder of a legal promissory note or promissory letter can file suit in small claims court and if they receive a judgment, this judgment is considered a public record. Some public records can have an adverse effect on a credit score, so even borrowing money from a personal friend or family member can affect an individual’s credit rating if they are unable to repay the promissory note.
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