Should I require a personal guarantee?

Yes — for any LLC or corporation borrower, almost always. Without a personal guarantee, the borrower entity may be the only obligor; if the entity has no assets, the loan is uncollectible regardless of the agreement. The exception: well-capitalized borrowers with significant collateral may negotiate to limit or eliminate guarantees, often with higher interest rates as compensation.

What's the difference between secured and unsecured?

Secured loans are backed by specific collateral (equipment, real estate, accounts receivable, etc.); the lender can seize the collateral on default after proper notice. Unsecured loans are general claims against the borrower's estate, with no specific recovery rights. Secured loans are far more enforceable; the trade-off is administrative complexity (UCC-1 filings, asset descriptions, etc.).

Can I forgive the loan later if my business succeeds?

Yes, but with tax consequences. Forgiveness of debt is generally treated as a taxable gift to the borrower (above the annual exclusion of $18,000 in 2024) or as taxable income (if the lender is also an employer, customer, etc.). Plan forgiveness deliberately rather than informally — discuss with a CPA. Some family loans are structured to be forgiven over time at the annual gift-exclusion rate, which can be a tax-efficient inheritance strategy.

Do I need to register or report this loan?

For private loans between individuals/entities, generally no — these are private commercial transactions. Reporting includes: (a) the lender reports interest income on Schedule B (above $10 of interest); (b) for loans above the annual gift exclusion, gift-tax reporting may apply; (c) some states require commercial-loan-broker licenses for habitual lenders; (d) UCC-1 filings for secured loans are recommended at the Secretary of State. Consult a CPA before lending sums above $50K.

Business Loan Agreement (Personal Lender)

Loan agreement between an individual lender and a business — used for friends-and-family financing, founder loans, and seed-stage capital.

Customise

Effective date

Lender — full name

Lender — address

Borrower — business name

Borrower — address

Loan amount ($)

Annual interest rate (%)

Must equal or exceed IRS Applicable Federal Rate (AFR) to avoid imputed-interest issues.

Loan term (years)

Payment schedule

Monthly payment ($) — if applicable

First payment due date

Collateral (if any)

Personal guarantor — name (if any)

Late fee terms

Prepayment terms

State (governing law)

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BUSINESS LOAN AGREEMENT

This Business Loan Agreement (this "Agreement") is entered into and effective as of May 7, 2026 (the "Effective Date") between:

  LENDER:  Patricia A. Wellington
  Address: 1701 Cedar Hill Road, Asheville, NC 28803

  BORROWER: Daniel Wellington Consulting LLC
  Address:  4520 Sycamore Court, Asheville, NC 28804

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1. LOAN
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Lender hereby loans to Borrower the principal sum of $50,000.00 (the "Principal" or "Loan").

Disbursement: Lender shall disburse the Principal to Borrower within 5 business days of the Effective Date by check, ACH transfer, or wire transfer to Borrower's designated business account.

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2. INTEREST
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The Loan accrues interest at the rate of 7% per annum, calculated on the unpaid principal balance.

The interest rate is intended to be at or above the IRS Applicable Federal Rate (AFR) to avoid below-market loan recharacterization under IRC §7872. Borrower acknowledges that Lender has selected the rate based on AFR guidance and tax-planning considerations.

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3. PAYMENT SCHEDULE
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Monthly principal-and-interest payments of approximately $990.00, applied first to accrued interest and then to principal, beginning May 7, 2026 and continuing on the same day each month for 60 months.

All payments shall be made by ACH transfer or check to Lender at the address above (or as updated in writing).

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4. PREPAYMENT
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Borrower may prepay all or any portion of the principal at any time without penalty. Prepayments shall be applied first to accrued interest and then to principal.

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5. LATE PAYMENTS
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Late fee of 5% of past-due amount, after a 10-day grace period.

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6. COLLATERAL / SECURITY
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This Loan is unsecured. Borrower's obligation to repay is a general unsecured obligation.

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7. PERSONAL GUARANTEE
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Daniel R. Wellington (the "Guarantor") personally and unconditionally guarantees the prompt payment and performance of all obligations of Borrower under this Agreement. Guarantor's liability is direct, primary, and not subject to exhaustion of remedies against Borrower.

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8. REPRESENTATIONS BY BORROWER
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Borrower represents and warrants that:

  (a) Borrower is duly organized and validly existing under the laws of its jurisdiction of formation;
  (b) Borrower has full power and authority to enter into and perform this Agreement;
  (c) The execution and performance of this Agreement does not conflict with any other agreement to which Borrower is a party;
  (d) The financial information provided to Lender is true and accurate in all material respects;
  (e) The Loan proceeds will be used solely for legitimate business purposes.

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9. AFFIRMATIVE COVENANTS
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During the term of the Loan, Borrower shall:

  (a) Maintain its business operations in the ordinary course;
  (b) Maintain books and records in accordance with generally accepted accounting principles;
  (c) Provide Lender with annual financial statements within 90 days of fiscal year end;
  (d) Pay all taxes, assessments, and government charges when due;
  (e) Maintain insurance customary for its business;
  (f) Comply with all applicable laws and regulations.

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10. EVENTS OF DEFAULT
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Each of the following constitutes an Event of Default:

  (a) Borrower fails to pay any amount when due, and the failure continues 10 days after written notice from Lender;
  (b) Borrower breaches any other material covenant and fails to cure within 30 days of notice;
  (c) Any representation or warranty proves to have been materially false or misleading when made;
  (d) Borrower files for bankruptcy or has involuntary bankruptcy filed against it that is not dismissed within 60 days;
  (e) Borrower ceases operations or becomes insolvent;
  (f) The Guarantor (if any) repudiates the personal guarantee.

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11. REMEDIES
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Upon an Event of Default, Lender may, at Lender's option:

  (a) Declare all unpaid principal and accrued interest immediately due and payable;
  (b) Exercise any rights against collateral (if secured);
  (c) Pursue any other rights and remedies available at law or in equity;
  (d) Recover reasonable attorney fees and costs of collection.

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12. GOVERNING LAW
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This Agreement is governed by the laws of the State of North Carolina.

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13. NOTICES
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All notices shall be in writing, sent to the addresses above (or as updated in writing).

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14. ENTIRE AGREEMENT
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This Agreement constitutes the entire agreement between Lender and Borrower regarding the Loan and supersedes all prior negotiations and agreements.

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15. AMENDMENT AND WAIVER
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This Agreement may be amended only by a written instrument signed by both parties. No waiver of any provision is effective unless in writing.

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16. COUNTERPARTS
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This Agreement may be executed in counterparts, each of which is deemed an original.

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EXECUTION
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.


LENDER:                                      BORROWER:

_______________________________            _______________________________
Patricia A. Wellington                  Daniel Wellington Consulting LLC

Date: ____________________                   By:    _____________________________
                                              Title: _____________________________
                                              Date:  _____________________________


GUARANTOR (acknowledging personal guarantee):

_______________________________
Daniel R. Wellington
Personal Guarantor

Date: ____________________

About this template

A business loan agreement between an individual lender (often a parent, friend, or angel) and a small business is one of the most common — and most-mishandled — financing arrangements. Without a written agreement, three things go wrong: (1) family/friendship is destroyed when expectations diverge; (2) the IRS may recharacterize an interest-free or below-market loan as a gift, triggering gift tax (or income tax to the recipient) under IRC §7872; (3) the loan becomes unenforceable if the borrower defaults, because there's no documented obligation. The most-litigated areas: (1) Interest rate and IRS AFR — for loans above $10,000, the IRS requires interest at or above the Applicable Federal Rate (AFR), published monthly. Loans below the AFR are recharacterized: the lender is deemed to have given the borrower a gift equal to the foregone interest each year (potentially triggering gift tax above the annual exclusion); the borrower is deemed to have received imputed interest income. Below-market rate ALSO transfers wealth between generations, which can trigger generation-skipping transfer tax in family-loan contexts. (2) Personal guarantee — for LLC/corp borrowers, the personal guarantee is the only meaningful enforcement against an undercapitalized entity. Without it, a lender suing the LLC for default may collect nothing if the LLC has no assets. (3) Collateral — secured loans are far more enforceable than unsecured. Filing a UCC-1 financing statement perfects the security interest against bankruptcy and other creditors. (4) Use of funds — a clear use-of-funds clause prevents the borrower from using loan proceeds for personal expenses or speculative investments. (5) Default and acceleration — without explicit acceleration on default, the lender must wait for each payment to come due before suing, which makes recovery practically impossible. Family-loan tax considerations: (a) Loans above $10,000 must charge AFR or higher to avoid gift treatment; (b) Loans above $14,000 in a single year (annual gift exclusion 2024) plus imputed-interest gift treatment can trigger gift-tax filing; (c) Forgiveness of a loan is a taxable gift (or compensation, if employee) — plan deliberately rather than informally; (d) Interest received by the lender is taxable income; many family lenders forget this and don't report. State considerations: most states have usury caps on interest rates that apply to private loans (typically 10-25% depending on state and loan size). Loans above the usury cap are unenforceable as to the excess interest. State-specific licensing for commercial-loan brokers may apply if the lender makes loans regularly. For seed-stage startups, this template is the simpler alternative to a convertible note or SAFE; convertible debt is preferable when equity conversion is anticipated. For pure debt arrangements (no equity component), this template is appropriate.

When to use it

Friends-and-family financing for an early-stage business.
Founder loaning capital to their own LLC (founder loan to entity).
Parents loaning startup capital to adult children (with proper IRS-compliant interest rate).
Inter-business loans within a corporate group.
Bridge loans before institutional financing.

What to include

Lender and borrower identification.
Principal amount and disbursement terms.
Interest rate (at or above IRS Applicable Federal Rate).
Payment schedule (amortizing, interest-only, lump-sum).
Collateral or security (or explicit unsecured statement).
Personal guarantee (essential for LLC/corp borrowers).
Default, remedies, and acceleration.
Affirmative covenants (financial reporting, etc.).

Frequently asked

For loans above $10,000, charge at least the IRS Applicable Federal Rate (AFR) for the loan term to avoid below-market loan recharacterization under IRC §7872. AFR rates are published monthly by the IRS at irs.gov. Recent rates have been 4-5% for short-term, 4-5% for mid-term (3-9 years), 5-6% for long-term. Charging the AFR or slightly above is the simplest way to avoid imputed-interest gift-tax issues.

⚠ Legal disclaimer. Loan agreements are governed by state law (usury caps, commercial-loan licensing, secured-transactions rules vary by state). Federal tax law (IRC §7872 below-market loan rules, IRS AFR requirements) applies to family and below-market loans. State usury caps (typically 10-25%) cap maximum allowable interest. For loans above $50K, secured loans, or loans with complex terms, engage a business attorney. For loans involving family members, also discuss with a CPA to understand gift-tax and imputed-interest implications. Not legal or tax advice.