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Contracts and Loans
Starting Your Own Business
Contracts and Loans
As I stated earlier, the business person deals with contracts more often that she probably realizes. Contrary to popular belief, not all contracts need to be in writing,
and those that are made orally may be upheld and enforced by a court. Similarly, not every written contract is valid and binding. A contract is valid if there is agreement,
meaning the two parties intended to bargain for the same thing, an offer was made, and the offer was accepted. Also, there absolutely must be consideration -- the parties
must make an exchange. Nothing is enforceable if there is no consideration involved. All contracts must be legal -- that is, they must not involve fraud or illegal activity.
All parties involved in a contract must also demonstrate capacity; no minors or mentally impaired people have the capacity to legally enter into a contract. If all of these
elements are present in an oral agreement, however informal it seems, the agreement may be upheld. Also, if a person seriously relies on a promise, a court may consider that
promise to be a binding contract, so be careful what you promise, even in jest. Generally, all contracts that involve the sale or leasing of land are required to be in writing.
While there are certain exceptions, it is best to be safe and have all major agreements in writing.
The major point concerns not only the entrepreneur, but also the good people willing to provide the loans necessary for him or her to get a business started.
Whenever a business person makes a loan to someone, or sells something to another business on credit, the lender or seller generally will take a security interest in some
kind of collateral (for money loaned) or in the item itself (the thing that was sold). The theory behind the practice is that if the business fails and the owner cannot pay
the debts he owes, the lenders will be able to collect the collateral and retrieve the value of their loans or sales. However, a business owner is allowed to grant a security
interest in one item to more than one lender. So, if Billís Buffalo Grill goes under, and he gave the Local Bank and Sally Summer a security interest in the same deep fryer,
who gets it? It all depends on who perfected their security interest. To perfect means to put the world on notice that you have a stake in that particular item. The most
common and safest way to perfect is to file a financing statement. This must be done with extreme accuracy and timeliness, and of course at the appropriate state office.
Once you have perfected a security interest, you have taken an extremely wise step to ensure that you will be protected in the event of the debtorís bankruptcy or failure
to pay his debts. And, as business person, you now can be sure that once a lender has perfected a security interest, he or she legally is entitled to that collateral or
property once you stop paying your bills.
As with any issue that involves local legislation and current, accurate laws, always check with a lawyer and your local town and state laws when setting up a business.
For help getting started, visit http://www.sba.gov/ to find useful tools and links, and also to get connected to your local state small business offices.
Posted: July 10, 2005