Selling and Buying Unsecured Promissory Notes
From time-to-time corporations in California sell unsecured promissory notes to investors in order to raise cash. These are mostly larger corporations with audited financial statements, but some are mid-sized companies with financial statements that are not audited.
Unsecured promissory notes are not backed by any collateral. If the borrower defaults on a note, the buyer's recourse is to file suit against the borrower in Order to collect payments due.
Investors who acquire unsecured promissory notes are relying on the following: (1) The credit rating of the company borrowing the money, (2) The financial statement of the company borrowing the money, (3) The terms of the note, and (4) The likelihood of being able to successfully sue the borrower and collect the amount owing.
Promissory notes are acquired by accredited investors who have the ability to assume the risks inherent with this type of investment. The risks are substantial, making the interest rates on these notes high. The interest rates will vary depending on the perceived risk and interest rates available on other investments.