Legal Question in Investment Law in California

Re: Promissory Note to raise business capital

You are permitted to use promissory notes to finance your business; the real question is whether anyone will lend you the money. A promissory note is not a form of magic, it is just a piece of paper that says you promise to repay a sum of money someone has lent you.

If you are unable to obtain venture capital or an SBA loan, who else will lend to you? After all, the VC and the SBA would also be asking you to sign promissory notes or the equivalent.

There are some state law and SEC-related issues which may affect promissory notes. The most common issue seems to be that the interest rates demanded by lenders or offered by borrowers on promissory notes may be usurious.

Thinking of promissory notes as a method for financing a business is akin to thinking about using a trust deed to buy a house. Sure, a trust deed will be used, but first you need to find a lender that believes you're qualified and is willing to make the loan the trust deed will secure. Your first job is to find the lender who will loan you cash in exchange for your note.