Writing a Legally Binding Loan Agreement for Your Small Business in Canada

Obtaining financing for your small business in Canada requires careful attention to the legal and financial aspects involved. One effective tool commonly used in business loans is a promissory note.

In this comprehensive guide, we will explore the essential elements of using promissory notes for small business loans, their benefits for lenders and borrowers, and key considerations to ensure a strong and legally binding loan agreement. The information provided is applicable across all provinces in Canada.

Understanding Promissory Notes

A promissory note is a legally binding document that outlines the terms and conditions of a loan agreement between a lender and a borrower. It serves as tangible evidence of the borrower's commitment to repay the loan within a specified period, including the agreed-upon interest rate. Promissory notes bring clarity and legal protection to small business loans.

Benefits for Small Business Owners

Clarity and Security

Promissory notes establish transparent repayment terms, minimizing confusion and potential disputes. They outline the principal amount, interest rate, repayment schedule, and any additional fees or penalties.

Legal Enforceability

Promissory notes provide a solid legal framework for loan repayment, assuring lenders that they can take legal action if the borrower defaults. This reassurance encourages lenders to provide financing to small businesses.


Promissory notes can be tailored to meet the specific needs of small businesses. Borrowers have the opportunity to negotiate terms and conditions that align with their circumstances, such as repayment flexibility or collateral requirements.


Utilizing promissory notes demonstrates professionalism and financial responsibility, positively influencing potential investors, partners, and stakeholders. It signifies your commitment to fulfilling your business obligations.

Key Considerations for Small Business Loans

Loan Amount and Interest Rate

Clearly define the loan amount, interest rate, repayment period, and any applicable late fees or penalties.

Personal or Business Loan

Depending on your circumstances, lenders may be willing to provide funds either directly to your corporation or to you as an individual borrower.

In some cases, lenders may only be open to extending a personal loan to you. If you receive a personal loan, you would then need to transfer the funds to your corporation. This can be done by either providing an interest-free loan to your corporation or issuing shares in the corporation to yourself. It's crucial to note that with a personal loan, you will bear the responsibility of repayment, even in the event of your business encountering financial difficulties.

On the other hand, corporate loans carry the advantage of being dischargeable through the declaration of bankruptcy by the corporation. This means that if your corporation faces insolvency, the loan can be resolved through the corporate bankruptcy process.


In certain situations, lenders may require a cosigner for a small business loan. A cosigner is a third party who agrees to take on the responsibility of repaying the loan if the borrower is unable to do so. Including a cosigner can provide additional security for the lender, especially if the borrower has limited credit history or a less-than-optimal financial standing.

Repayment Schedule

When considering promissory notes for small business loans, it's important to understand the difference between an "on demand" promissory note and a "fixed term" promissory note.

An "on demand" promissory note allows the lender to request repayment of the loan at any time. There is typically no fixed maturity date specified in the note. This type of note provides flexibility for the lender, as they can demand repayment whenever they choose.

On the other hand, a "fixed term" promissory note specifies a predetermined repayment schedule with a fixed maturity date. This means that both the borrower and lender agree upon a specific timeframe for the loan repayment, including the principal amount and any applicable interest.

When crafting a promissory note for your small business loan, it is crucial to establish a realistic repayment schedule that aligns with your business's cash flow and revenue projections. This ensures that you can meet your repayment obligations consistently and in a timely manner, fostering a strong relationship with the lender. By demonstrating your commitment to fulfilling your loan obligations, you enhance your credibility as a borrower and maintain a positive rapport with the lender.

Default and Remedies

Carefully consider the potential consequences of defaulting on the loan and be aware of the remedies available to the lender in such situations. These remedies may include accelerating the loan repayment, imposing additional interest or penalties, or pursuing legal action to recover the outstanding amount.

While the specific details of potential legal action may not be explicitly mentioned in the promissory note, it is important to note that lenders have options available to them in case of default. The promissory note may include provisions regarding late fees or penalties for missed or delayed payments.

How to Write Your Loan Agreement

While most lenders have legal teams to draft loan agreements, if you have a personal connection with someone willing to lend you money, you can use LegalDeeds to write a legally binding promissory note for only $5.

To get started, gather essential details including the lender's full legal name, loan amount, interest rate, and any specific repayment terms agreed upon. LegalDeeds simplifies the process, making it quick, easy, and cost-effective.

Follow these steps to write a promissory note using LegalDeeds:

  1. Visit LegalDeeds: Access the promissory note page on the LegalDeeds website.
  2. Provide Necessary Details: LegalDeeds will ask you questions about the loan to customize the loan agreement.
  3. Review: LegalDeeds will let you a watermarked version of your document for free.
  4. Checkout and Download: Once you're satisfied with the promissory note, LegalDeeds will email you the final document as a PDF file. Print and sign the document, then send a copy to the lender for their records.

While LegalDeeds offers a user-friendly platform for writing promissory notes, you should consult a legal professional if you want a promissory note that involves collateral or complicated default clauses. Nevertheless, LegalDeeds meets most small business' needs. The platform's affordability and instant accessibility make it a convenient solution for small business owners seeking a reliable loan agreement.


Promissory notes play a vital role in facilitating small business loans, providing a clear framework for loan agreements and instilling confidence in both lenders and borrowers. As a small business owner, understanding the legal and financial aspects of promissory notes is crucial for navigating the loan process effectively and establishing a solid foundation for your business's financial stability.

At LegalDeeds, we offer customizable promissory note templates for just $5 that meet your small business needs. Start your journey towards securing a small business loan with confidence by leveraging the power of promissory notes.



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