How to Secure a Promissory Note

Begin by having the borrower sign a loan agreement or promissory note. A promissory note is just another term for a loan agreement. Under either title, this is a contract that identifies the loan given to the borrower and specifies the terms of repayment.^[9]

• Include all relevant parties, dates, and amounts to make sure the promissory note is enforceable.^[10]

Have the borrower sign a mortgage agreement. A mortgage is a legal term used to describe an agreement between the parties that certain real estate will be given as collateral to secure a loan. The simplest mortgage just needs to identify the parties, describe the loan, and identify the property. Depending on the amount of the loan and the identities of the parties, some mortgage documents can become quite complicated.^[11]

• Some online resources exist to help you create your own mortgage agreement. One such resource is Rocket Lawyer, which provides templates that are valid for most U.S. states. You simply identify your state, provide the details of your loan, and the program creates a mortgage document for you.
• You should have the mortgage witnessed and notarized. In some states, this is a requirement, such that failure to do so will nullify the mortgage. In others, it may not be required but is still a good practice.

File the mortgage and loan agreement with the appropriate office. To finalize the secured loan with the real estate collateral, you must file the completed mortgage and loan agreement with a state office where the property is located. The requirements for filing differ from state to state. You should check with a local attorney or the secretary of state’s office for the state where the property exists to determine the appropriate filing method.^[12]

• For example, in Massachusetts, the loan documents are filed with the Registry of Deeds in the county where the property is located.
• In Connecticut, mortgages are recorded with the town clerk where the property exists.
• In New York, you must file the mortgage with the county clerk for the county where the property exists.

Attach the loan to some company assets. If you are giving a loan to a company or to an individual who is operating a business, you may want to secure your loan with some property of the business. This may include the company’s own equipment, inventory that it has for sale, or even something less tangible, like its accounts receivable. To attach the loan to any such property, you will need to have the owner sign a financing statement, which is sometimes also referred to as a “UCC” or “UCC-1” statement. ^[13]

• Be careful that the individual or company signing the financing statement is the actual owner of the collateral. For example, if you are giving a loan to John Smith, an individual, and John Smith is the president of XYZ Corporation, you will need to identify carefully whether the collateral is owned by John Smith or by XYZ Corporation. The person or company giving the collateral should be the same as the person or company getting the benefit of your loan.

Identify the collateral carefully. To complete the financing statement, you need to identify the parties to the loan and provide an adequate description of the collateral. The description must be sufficiently clear so that any third party reading the financing statement will understand what it is meant to cover.^[14]

• For example, if you intend to secure the loan with a particular photocopy machine that the borrower owns, you should identify it by description, make, model, and even serial number, if possible. On the other hand, if you intend to secure the loan with all of the borrower’s office equipment, you may use a more general description, such as “Equipment.” Other general descriptive terms that are allowable are “Goods,” “Inventory,” or “Fixtures.”
• You can describe intangible business assets as “Accounts,” which includes the borrower’s right to receive payments from its customers, “Chattel paper,” which includes other secured loans that the borrower may have the right to collect, or “General intangibles,” which simply includes other intangible assets that are not covered by the first two categories.

Perfect the security interest by filing the loan documents with the appropriate office. The most common and most effective method of perfecting a security interest in tangible or intangible business assets is by filing the security agreement and financing statement. Each state has different regulations for the proper filing location. You will need to check with the Secretary of State’s office for the state where your borrower is located, in order to determine the correct place and method for filing. If your borrower operates in multiple states, you may need to file your loan documents in more than one state. In some states, you may be required to file with the Secretary of State, generally in the state capital, and also file in the clerk’s office for any county within the state where the borrower does business.^[15]

• It is a good idea to work with an attorney who is familiar with the laws of the state where you wish to perfect your security interest, in order to be sure that you file appropriately.
• If you neglect to file your loan documents in the appropriate offices, you may lose your position of priority. The borrower will still owe you the money, but if another lender files in a place where you have not, then that lender may be able to collect the collateral before you.

Take possession of the collateral to perfect a security interest. A second method, which may be more difficult than filing, is to take actual possession of the collateral. This is often referred to as repossession. You must be careful, if using this method, that you do so in a peaceful and lawful manner. You may not break in to a property to take possession of collateral, and you may not take possession in such a way that creates a disturbance.^[16]

Take legal control of the collateral to perfect a security interest. A final alternative for perfecting a security interest in property is to take “control” over the collateral. This does not require actual possession of the property, but it does require you to take sufficient legal steps so that you control what can be done with the collateral. This method generally applies to intangible assets like accounts receivable, deposit accounts or investment accounts.^[17]

Attach the loan to some identified collateral. If you are lending to an individual, you may wish to secure your promissory note with some of that person’s personal property. Personal property can be anything that is not a motor vehicle or real estate. This could include anything of sufficient value, such as a big screen television, bank accounts, valuable antiques, or anything else you identify.^[18]

Complete a financing statement to attach the collateral to the promissory note. To attach the loan to any personal property, you will need to have the borrower complete a financing statement, which is sometimes also referred to as a “UCC” or “UCC-1” statement. ^[19]

• The financing statement requires you to provide the borrower’s name and address, the lender’s name and address, and a description of the collateral. The description must be specific enough to identify the property for any third party.