<PAGE>   1
                                                                   EXHIBIT 10.5


                                PROMISSORY NOTE



$10,000,000.00                                                December 20, 1996

         ALLIED CAPITAL CORPORATION, a corporation organized under the laws of
Maryland (the "Borrower"), for value received, hereby promises to pay to the
order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W.,
Washington, D.C. 20006, in lawful money of the United States and in immediately
available funds the principal sum of Ten Million and no/100 Dollars
($10,000,000.00) or, if less, the aggregate unpaid principal amount of all
loans advanced or re-advanced by the Bank to the Borrower hereunder.

         1.  Payment of Principal and Interest; Prepayment; Etc.

                  (a)  Principal Payments.  The principal amount of each loan
hereunder shall be due and payable on the Termination Date (as defined in the
Credit Agreement, hereinafter defined).

                  (b) Interest Rate; Interest Payments. Except as otherwise
provided hereinafter, each borrowing under this Note shall bear interest on the
unpaid principal amount of such borrowing from time to time at a rate per annum
equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each
change in the LIBOR Rate hereunder shall be effective without notice to the
Borrower on the first Business Day of each calendar month. Interest shall be
payable on the first of each calendar month commencing on the first such date
after each borrowing hereunder and at the Termination Date or earlier maturity
hereof. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. As used herein:

         "LIBOR" means, with respect to any calendar month or portion thereof
         during which any loan hereunder is outstanding, the rate per annum
         (rounded upwards, if necessary, to the next higher 1/100 of 1%) which
         is the average of interbank offered rates for U.S. dollar deposits in
         the London interbank market for a period of one month, as reported to
         the Bank on an On-Line Information Service at approximately 10:00 a.m.
         (Washington, D.C. time)(the "Index") on the first Business Day of each
         calendar month. If for any reason on such Business Day the Bank is
         unable to access the Index or LIBOR is not reported by the Index, then
         LIBOR shall be the London interbank offered rate for U.S. dollars
         deposits for a period of one month as reported in The Wall Street
         Journal on such Business Day. If LIBOR is not available, the Bank
         shall use the most comparable rate at its sole discretion or may use
         the average of the rates for the next shortest and next longest
         maturities. The Borrower acknowledges and agrees that the
         determination by the Bank of LIBOR shall be conclusive and binding on
         the Borrower in the absence of manifest error. LIBOR is not
         necessarily the rate at which the Bank offers or receives U.S. dollar
         deposits in the London interbank market or elsewhere, and is not
         necessarily the lowest rate charged by the Bank on loans.

         "Business Day" means any day except a Saturday, Sunday or other day on
         which commercial banks in the District of Columbia are generally
         authorized to close.

         "On-Line Information Service" means a textline or other on-line
         information service provided to the Bank by any of Reuters Information
         Services, Inc., Knight-Ridder

<PAGE>   2



         Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial
         Markets News Services.

                  (c) Post-Maturity Interest. After maturity, whether by
acceleration or otherwise, this Note shall bear interest payable on demand at a
variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent
permitted by law, any payment of interest on this Note not made when due shall
bear interest from the date when due until payment is made payable on demand,
at a rate per annum equal to 2% in excess of the LIBOR Rate.

                  (d) Prepayment. This Note may be prepaid in whole at any time
or in part from time to time without premium or penalty. This Note shall
immediately be prepaid to the extent that the principal amount hereof at any
time exceeds the Maximum Amount (as defined in the Credit Agreement).

                  (e) Advances; Evidence of Amounts Due. This Note is held by
the Bank as a master note against which loans may be advanced in lesser
amount(s) than the principal amount. The Borrower shall give the Bank a written
or telexed request or a telephonic request (to be promptly confirmed in
writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of
the desired borrowing, specifying: (i) the Business Day of the desired
borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon
request, notify the Borrower telephonically of the LIBOR Rate. The Borrower
shall be liable only for so much of the principal amount as shall be equal to
the total of the amounts advanced or re-advanced against this Note to or for
the Borrower by the Bank from time to time, less all payments made by or for
the Borrower and applied by the Bank to principal. The Borrower shall also be
liable for interest on each such advance or re-advance as shown on the Bank's
books and records, provided that the rate of such interest is in accordance
with the applicable rate or rates specified in this Note. The Borrower
acknowledges that a statement signed by an officer of the Bank setting forth
the amount of principal and interest owed hereon as reflected in such books and
records shall be presumptive evidence of the facts stated therein and shall,
absent manifest error, be conclusive and binding. Any statement of account
delivered to the Borrower shall be deemed correct and accepted unless a written
statement of exceptions thereto is delivered to the Bank within thirty (30)
days after mailing of such statement of account. In making any advance or
re-advance hereunder, the Bank shall be entitled to rely upon any notice of
borrowing or other instructions, whether oral, written or by any form of
telecommunication, purporting to be made by a person designated to the Bank by
the Borrower as an Authorized Representative of the Borrower, and deposit of
the proceeds of an advance or re-advance hereunder in a deposit account in the
name of the Borrower or the remittance of any proceeds to persons designated in
such instructions shall conclusively establish that such loan was duly made
hereunder.

                  (f) Payments Due on Non-Business Days. If any installment of
principal on this Note becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, and interest shall be payable thereon at the rate herein specified during
such extension. If any payment of interest on any loan evidenced by this Note
becomes due and payable on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day, together with interest
accrued during such extension.


                                       2
<PAGE>   3



         2. Use of Loans. The loans made hereunder shall be used for the
purpose of carrying on a business or commercial activity within the meaning of
the District of Columbia Code Sections 28- 3301(d)(1)(B).

         3. Events of Default, Remedies. The occurrence of any Event of Default
under the Credit Agreement shall constitute an Event of Default hereunder. Upon
the occurrence of an Event of Default, the Bank is entitled to exercise the
remedies set forth in the Credit Agreement.

         4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket
charges and expenses incurred by the Bank, including the reasonable fees and
expenses of its legal counsel (including the cost of the Bank's in-house
counsel as determined by the Bank) in connection with the negotiation,
preparation and execution of this Note and any amendments, waivers,
modifications or supplements hereto, and the enforcement of any provision of
this Note or any amendment, waiver, modification or supplement hereto and the
collection of this Note.

         5. Additional Costs. In the event that at any time the Bank shall be
required to maintain reserves against "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the Federal Reserve System or in the
event that there shall occur any change in applicable law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof or the introduction of any law or regulation subjects
the Bank to any tax or governmental charge of any kind whatsoever with respect
to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or
changes the basis of taxation of payments to the Bank of principal of or
interest payable with respect to this Note (except for changes in the rate of
tax based solely on the overall net income of the Bank) or imposes, modifies or
deems applicable any reserve, special deposit, capital ratio or similar
requirement against assets held by or deposits in or for the account of, or
loans by, the Bank or imposes on the Bank, directly or indirectly, any other
conditions affecting this Note or the cost of U.S. dollar deposits obtained by
the Bank in the domestic market or the London interbank market, and the result
of any of the foregoing is to increase the cost to the Bank of making or
maintaining loans hereunder, then the Bank shall notify the Borrower in writing
of the additional amount or amounts necessary to compensate the Bank for such
additional costs. A certificate of an officer of the Bank setting forth the
calculation of such costs shall be conclusive and binding, absent manifest
error. In the event the Borrower is unwilling to pay such additional costs,
during the thirty days following the receipt of such notice, the Bank and the
Borrower shall negotiate in good faith with a view toward modifying this Note
to provide a substitute basis for the interest rate provided above which is
financially a substantial equivalent of such rate. If, within such thirty-day
period, the Bank and the Borrower shall agree in writing upon such substitute
rate, then such substitute rate shall be retroactive to, and effective from,
the date of the aforesaid notice. If, within such thirty-day period, the Bank
and the Borrower shall fail to agree in writing upon such substitute rate, the
Borrower agrees that this Note shall bear interest retroactive to, and
effective from, the date of the aforesaid notice at a rate equal to the rate
reported by The Wall Street Journal in its column "Money Rates" as the prime
rate (the "Prime Rate"). If more than one rate or a range of rates is reported,
the Prime Rate shall be the higher or highest such rate. In the event The Wall
Street Journal fails to report a prime rate, the Prime Rate shall mean that
rate announced from time to time by the Bank as its prime rate of interest. The
Prime Rate, determined in either manner, is not necessarily the lowest rate
charged by the Bank on loans.


                                       3
<PAGE>   4


         6.  Right of Setoff.   Unless this Note be paid at its maturity, or
when otherwise due, as herein provided, the Bank shall have all setoff rights
provided by law.

         7. Waivers and Consents. Except as otherwise expressly set forth
herein, the Borrower and all endorsers, guarantors, and sureties of this Note
(collectively the "Obligors") severally (a) waive all applicable exemption
rights, whether under the laws of the District of Columbia or otherwise, and
also waive, presentment for payment, protest, notice of protest, and diligence
in collecting this Note, (b) agree to the release of any party primarily or
secondarily liable hereon and agree that it will not be necessary for any
holder hereof, in order to enforce payment of this Note by any party, to first
institute suit against any other Obligor, and (c) consent to any one or more
extensions or postponements of time of payment of this Note on any terms or any
other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY
OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION
HEREWITH, IS HEREBY EXPRESSLY WAIVED.

         8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be
a contract under the laws of the District of Columbia (except for the conflict
of law provisions thereof) and shall be governed by, and construed in
accordance with, the laws of such jurisdiction. Wherever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note. If any
action arising out of this Note is commenced in any District of Columbia or
Federal court located in the District of Columbia, each party signatory hereto
hereby consents to the jurisdiction of any such court in any such action and to
the laying of venue in the District of Columbia. Any process in such action
shall be duly served if mailed by registered mail, postage prepaid, to the
Borrower at its address given herein or its last known business address, or if
otherwise served in acceptance with law. Any other notice or demand hereunder
may be made by hand delivery or certified or registered mail, return receipt
requested, to such address, with the same effect as if delivered in person.

         9. Incorporated Provisions. This Note is the Allied Note referred to
in an Unsecured Line of Credit Agreement dated as of the date hereof, between
the Borrower, Allied Investment Corporation, Allied Capital Financial
Corporation, and the Bank (the "Credit Agreement"), is subject to payment and
acceleration upon the terms specified therein, and hereby incorporates by
reference all of the provisions thereof.

ALLIED CAPITAL CORPORATION

By:/s/ G. Cabell Williams, III
   ----------------------------------
Name:   G. Cabell Williams, III
Title:  President


                                       4
<PAGE>   5



                                PROMISSORY NOTE


$10,000,000.00                                                December 20, 1996

         ALLIED INVESTMENT CORPORATION, a corporation organized under the laws
of Maryland (the "Borrower"), for value received, hereby promises to pay to the
order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W.,
Washington, D.C. 20006, in lawful money of the United States and in immediately
available funds the principal sum of Ten Million and no/100 Dollars
($10,000,000.00) or, if less, the aggregate unpaid principal amount of all
loans advanced or re-advanced by the Bank to the Borrower hereunder.

         1.  Payment of Principal and Interest; Prepayment; Etc.

                  (a)  Principal Payments.  The principal amount of each loan
hereunder shall be due and payable on the Termination Date (as defined in the
Credit Agreement, hereinafter defined).

                  (b) Interest Rate; Interest Payments. Except as otherwise
provided hereinafter, each borrowing under this Note shall bear interest on the
unpaid principal amount of such borrowing from time to time at a rate per annum
equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each
change in the LIBOR Rate hereunder shall be effective without notice to the
Borrower on the first Business Day of each calendar month. Interest shall be
payable on the first of each calendar month commencing on the first such date
after each borrowing hereunder and at the Termination Date or earlier maturity
hereof. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. As used herein:

         "LIBOR" means, with respect to any calendar month or portion thereof
         during which any loan hereunder is outstanding, the rate per annum
         (rounded upwards, if necessary, to the next higher 1/100 of 1%) which
         is the average of interbank offered rates for U.S. dollar deposits in
         the London interbank market for a period of one month, as reported to
         the Bank on an On-Line Information Service at approximately 10:00 a.m.
         (Washington, D.C. time)(the "Index") on the first Business Day of each
         calendar month. If for any reason on such Business Day the Bank is
         unable to access the Index or LIBOR is not reported by the Index, then
         LIBOR shall be the London interbank offered rate for U.S. dollars
         deposits for a period of one month as reported in The Wall Street
         Journal on such Business Day. If LIBOR is not available, the Bank
         shall use the most comparable rate at its sole discretion or may use
         the average of the rates for the next shortest and next longest
         maturities. The Borrower acknowledges and agrees that the
         determination by the Bank of LIBOR shall be conclusive and binding on
         the Borrower in the absence of manifest error. LIBOR is not
         necessarily the rate at which the Bank offers or receives U.S. dollar
         deposits in the London interbank market or elsewhere, and is not
         necessarily the lowest rate charged by the Bank on loans.

         "Business Day" means any day except a Saturday, Sunday or other day on
         which commercial banks in the District of Columbia are generally
         authorized to close.

         "On-Line Information Service" means a textline or other on-line
         information service provided to the Bank by any of Reuters Information
         Services, Inc., Knight-Ridder

                                       1

<PAGE>   6



         Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial
         Markets News Services.

                  (c) Post-Maturity Interest. After maturity, whether by
acceleration or otherwise, this Note shall bear interest payable on demand at a
variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent
permitted by law, any payment of interest on this Note not made when due shall
bear interest from the date when due until payment is made payable on demand,
at a rate per annum equal to 2% in excess of the LIBOR Rate.

                  (d) Prepayment. This Note may be prepaid in whole at any time
or in part from time to time without premium or penalty. This Note shall
immediately be prepaid to the extent that the principal amount hereof at any
time exceeds the Maximum Amount (as defined in the Credit Agreement).

                  (e) Advances; Evidence of Amounts Due. This Note is held by
the Bank as a master note against which loans may be advanced in lesser
amount(s) than the principal amount. The Borrower shall give the Bank a written
or telexed request or a telephonic request (to be promptly confirmed in
writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of
the desired borrowing, specifying: (i) the Business Day of the desired
borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon
request, notify the Borrower telephonically of the LIBOR Rate. The Borrower
shall be liable only for so much of the principal amount as shall be equal to
the total of the amounts advanced or re-advanced against this Note to or for
the Borrower by the Bank from time to time, less all payments made by or for
the Borrower and applied by the Bank to principal. The Borrower shall also be
liable for interest on each such advance or re-advance as shown on the Bank's
books and records, provided that the rate of such interest is in accordance
with the applicable rate or rates specified in this Note. The Borrower
acknowledges that a statement signed by an officer of the Bank setting forth
the amount of principal and interest owed hereon as reflected in such books and
records shall be presumptive evidence of the facts stated therein and shall,
absent manifest error, be conclusive and binding. Any statement of account
delivered to the Borrower shall be deemed correct and accepted unless a written
statement of exceptions thereto is delivered to the Bank within thirty (30)
days after mailing of such statement of account. In making any advance or
re-advance hereunder, the Bank shall be entitled to rely upon any notice of
borrowing or other instructions, whether oral, written or by any form of
telecommunication, purporting to be made by a person designated to the Bank by
the Borrower as an Authorized Representative of the Borrower, and deposit of
the proceeds of an advance or re-advance hereunder in a deposit account in the
name of the Borrower or the remittance of any proceeds to persons designated in
such instructions shall conclusively establish that such loan was duly made
hereunder.

                  (f) Payments Due on Non-Business Days. If any installment of
principal on this Note becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, and interest shall be payable thereon at the rate herein specified during
such extension. If any payment of interest on any loan evidenced by this Note
becomes due and payable on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day, together with interest
accrued during such extension.


                                       2

<PAGE>   7



         2. Use of Loans. The loans made hereunder shall be used for the
purpose of carrying on a business or commercial activity within the meaning of
the District of Columbia Code Sections 28- 3301(d)(1)(B).

         3. Events of Default, Remedies. The occurrence of any Event of Default
under the Credit Agreement shall constitute an Event of Default hereunder. Upon
the occurrence of an Event of Default, the Bank is entitled to exercise the
remedies set forth in the Credit Agreement.

         4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket
charges and expenses incurred by the Bank, including the reasonable fees and
expenses of its legal counsel (including the cost of the Bank's in-house
counsel as determined by the Bank) in connection with the negotiation,
preparation and execution of this Note and any amendments, waivers,
modifications or supplements hereto, and the enforcement of any provision of
this Note or any amendment, waiver, modification or supplement hereto and the
collection of this Note.

         5. Additional Costs. In the event that at any time the Bank shall be
required to maintain reserves against "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the Federal Reserve System or in the
event that there shall occur any change in applicable law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof or the introduction of any law or regulation subjects
the Bank to any tax or governmental charge of any kind whatsoever with respect
to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or
changes the basis of taxation of payments to the Bank of principal of or
interest payable with respect to this Note (except for changes in the rate of
tax based solely on the overall net income of the Bank) or imposes, modifies or
deems applicable any reserve, special deposit, capital ratio or similar
requirement against assets held by or deposits in or for the account of, or
loans by, the Bank or imposes on the Bank, directly or indirectly, any other
conditions affecting this Note or the cost of U.S. dollar deposits obtained by
the Bank in the domestic market or the London interbank market, and the result
of any of the foregoing is to increase the cost to the Bank of making or
maintaining loans hereunder, then the Bank shall notify the Borrower in writing
of the additional amount or amounts necessary to compensate the Bank for such
additional costs. A certificate of an officer of the Bank setting forth the
calculation of such costs shall be conclusive and binding, absent manifest
error. In the event the Borrower is unwilling to pay such additional costs,
during the thirty days following the receipt of such notice, the Bank and the
Borrower shall negotiate in good faith with a view toward modifying this Note
to provide a substitute basis for the interest rate provided above which is
financially a substantial equivalent of such rate. If, within such thirty-day
period, the Bank and the Borrower shall agree in writing upon such substitute
rate, then such substitute rate shall be retroactive to, and effective from,
the date of the aforesaid notice. If, within such thirty-day period, the Bank
and the Borrower shall fail to agree in writing upon such substitute rate, the
Borrower agrees that this Note shall bear interest retroactive to, and
effective from, the date of the aforesaid notice at a rate equal to the rate
reported by The Wall Street Journal in its column "Money Rates" as the prime
rate (the "Prime Rate"). If more than one rate or a range of rates is reported,
the Prime Rate shall be the higher or highest such rate. In the event The Wall
Street Journal fails to report a prime rate, the Prime Rate shall mean that
rate announced from time to time by the Bank as its prime rate of interest. The
Prime Rate, determined in either manner, is not necessarily the lowest rate
charged by the Bank on loans.


                                       3

<PAGE>   8



         6. Right of Setoff.   Unless this Note be paid at its maturity, or
when otherwise due, as herein provided, the Bank shall have all setoff rights
provided by law.

         7. Waivers and Consents. Except as otherwise expressly set forth
herein, the Borrower and all endorsers, guarantors, and sureties of this Note
(collectively the "Obligors") severally (a) waive all applicable exemption
rights, whether under the laws of the District of Columbia or otherwise, and
also waive, presentment for payment, protest, notice of protest, and diligence
in collecting this Note, (b) agree to the release of any party primarily or
secondarily liable hereon and agree that it will not be necessary for any
holder hereof, in order to enforce payment of this Note by any party, to first
institute suit against any other Obligor, and (c) consent to any one or more
extensions or postponements of time of payment of this Note on any terms or any
other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY
OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION
HEREWITH, IS HEREBY EXPRESSLY WAIVED.

         8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be
a contract under the laws of the District of Columbia (except for the conflict
of law provisions thereof) and shall be governed by, and construed in
accordance with, the laws of such jurisdiction. Wherever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note. If any
action arising out of this Note is commenced in any District of Columbia or
Federal court located in the District of Columbia, each party signatory hereto
hereby consents to the jurisdiction of any such court in any such action and to
the laying of venue in the District of Columbia. Any process in such action
shall be duly served if mailed by registered mail, postage prepaid, to the
Borrower at its address given herein or its last known business address, or if
otherwise served in acceptance with law. Any other notice or demand hereunder
may be made by hand delivery or certified or registered mail, return receipt
requested, to such address, with the same effect as if delivered in person.

         9. Incorporated Provisions. This Note is the AIC Note referred to in
an Unsecured Line of Credit Agreement dated as of the date hereof, between the
Borrower, Allied Capital Corporation, Allied Capital Financial Corporation, and
the Bank (the "Credit Agreement"), is subject to payment and acceleration upon
the terms specified therein, and hereby incorporates by reference all of the
provisions thereof.

ALLIED INVESTMENT CORPORATION



By:/s/ G. Cabell Williams, III
   -------------------------------------
Name:   G. Cabell Williams, III
Title:  President


                                       4

<PAGE>   9



                                PROMISSORY NOTE



$10,000,000.00                                                December 20, 1996

         ALLIED CAPITAL FINANCIAL CORPORATION, a corporation organized under
the laws of Maryland (the "Borrower"), for value received, hereby promises to
pay to the order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th
Street, N.W., Washington, D.C. 20006, in lawful money of the United States and
in immediately available funds the principal sum of Ten Million and no/100
Dollars ($10,000,000.00) or, if less, the aggregate unpaid principal amount of
all loans advanced or re-advanced by the Bank to the Borrower hereunder.

         1.  Payment of Principal and Interest; Prepayment; Etc.

                  (a)  Principal Payments.  The principal amount of each loan
hereunder shall be due and payable on the Termination Date (as defined in the
Credit Agreement, hereinafter defined).

                  (b) Interest Rate; Interest Payments. Except as otherwise
provided hereinafter, each borrowing under this Note shall bear interest on the
unpaid principal amount of such borrowing from time to time at a rate per annum
equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each
change in the LIBOR Rate hereunder shall be effective without notice to the
Borrower on the first Business Day of each calendar month. Interest shall be
payable on the first of each calendar month commencing on the first such date
after each borrowing hereunder and at the Termination Date or earlier maturity
hereof. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. As used herein:

         "LIBOR" means, with respect to any calendar month or portion thereof
         during which any loan hereunder is outstanding, the rate per annum
         (rounded upwards, if necessary, to the next higher 1/100 of 1%) which
         is the average of interbank offered rates for U.S. dollar deposits in
         the London interbank market for a period of one month, as reported to
         the Bank on an On-Line Information Service at approximately 10:00 a.m.
         (Washington, D.C. time)(the "Index") on the first Business Day of each
         calendar month. If for any reason on such Business Day the Bank is
         unable to access the Index or LIBOR is not reported by the Index, then
         LIBOR shall be the London interbank offered rate for U.S. dollars
         deposits for a period of one month as reported in The Wall Street
         Journal on such Business Day. If LIBOR is not available, the Bank
         shall use the most comparable rate at its sole discretion or may use
         the average of the rates for the next shortest and next longest
         maturities. The Borrower acknowledges and agrees that the
         determination by the Bank of LIBOR shall be conclusive and binding on
         the Borrower in the absence of manifest error. LIBOR is not
         necessarily the rate at which the Bank offers or receives U.S. dollar
         deposits in the London interbank market or elsewhere, and is not
         necessarily the lowest rate charged by the Bank on loans.

         "Business Day" means any day except a Saturday, Sunday or other day on
         which commercial banks in the District of Columbia are generally
         authorized to close.

         "On-Line Information Service" means a textline or other on-line
         information service provided to the Bank by any of Reuters Information
         Services, Inc., Knight-Ridder

<PAGE>   10



         Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial
         Markets News Services.

                  (c) Post-Maturity Interest. After maturity, whether by
acceleration or otherwise, this Note shall bear interest payable on demand at a
variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent
permitted by law, any payment of interest on this Note not made when due shall
bear interest from the date when due until payment is made payable on demand,
at a rate per annum equal to 2% in excess of the LIBOR Rate.

                  (d) Prepayment. This Note may be prepaid in whole at any time
or in part from time to time without premium or penalty. This Note shall
immediately be prepaid to the extent that the principal amount hereof at any
time exceeds the Maximum Amount (as defined in the Credit Agreement).

                  (e) Advances; Evidence of Amounts Due. This Note is held by
the Bank as a master note against which loans may be advanced in lesser
amount(s) than the principal amount. The Borrower shall give the Bank a written
or telexed request or a telephonic request (to be promptly confirmed in
writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of
the desired borrowing, specifying: (i) the Business Day of the desired
borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon
request, notify the Borrower telephonically of the LIBOR Rate. The Borrower
shall be liable only for so much of the principal amount as shall be equal to
the total of the amounts advanced or re-advanced against this Note to or for
the Borrower by the Bank from time to time, less all payments made by or for
the Borrower and applied by the Bank to principal. The Borrower shall also be
liable for interest on each such advance or re-advance as shown on the Bank's
books and records, provided that the rate of such interest is in accordance
with the applicable rate or rates specified in this Note. The Borrower
acknowledges that a statement signed by an officer of the Bank setting forth
the amount of principal and interest owed hereon as reflected in such books and
records shall be presumptive evidence of the facts stated therein and shall,
absent manifest error, be conclusive and binding. Any statement of account
delivered to the Borrower shall be deemed correct and accepted unless a written
statement of exceptions thereto is delivered to the Bank within thirty (30)
days after mailing of such statement of account. In making any advance or
re-advance hereunder, the Bank shall be entitled to rely upon any notice of
borrowing or other instructions, whether oral, written or by any form of
telecommunication, purporting to be made by a person designated to the Bank by
the Borrower as an Authorized Representative of the Borrower, and deposit of
the proceeds of an advance or re-advance hereunder in a deposit account in the
name of the Borrower or the remittance of any proceeds to persons designated in
such instructions shall conclusively establish that such loan was duly made
hereunder.

                  (f) Payments Due on Non-Business Days. If any installment of
principal on this Note becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, and interest shall be payable thereon at the rate herein specified during
such extension. If any payment of interest on any loan evidenced by this Note
becomes due and payable on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day, together with interest
accrued during such extension.


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<PAGE>   11



         2. Use of Loans. The loans made hereunder shall be used for the
purpose of carrying on a business or commercial activity within the meaning of
the District of Columbia Code Sections 28- 3301(d)(1)(B).

         3. Events of Default, Remedies. The occurrence of any Event of Default
under the Credit Agreement shall constitute an Event of Default hereunder. Upon
the occurrence of an Event of Default, the Bank is entitled to exercise the
remedies set forth in the Credit Agreement.

         4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket
charges and expenses incurred by the Bank, including the reasonable fees and
expenses of its legal counsel (including the cost of the Bank's in-house
counsel as determined by the Bank) in connection with the negotiation,
preparation and execution of this Note and any amendments, waivers,
modifications or supplements hereto, and the enforcement of any provision of
this Note or any amendment, waiver, modification or supplement hereto and the
collection of this Note.

         5. Additional Costs. In the event that at any time the Bank shall be
required to maintain reserves against "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the Federal Reserve System or in the
event that there shall occur any change in applicable law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof or the introduction of any law or regulation subjects
the Bank to any tax or governmental charge of any kind whatsoever with respect
to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or
changes the basis of taxation of payments to the Bank of principal of or
interest payable with respect to this Note (except for changes in the rate of
tax based solely on the overall net income of the Bank) or imposes, modifies or
deems applicable any reserve, special deposit, capital ratio or similar
requirement against assets held by or deposits in or for the account of, or
loans by, the Bank or imposes on the Bank, directly or indirectly, any other
conditions affecting this Note or the cost of U.S. dollar deposits obtained by
the Bank in the domestic market or the London interbank market, and the result
of any of the foregoing is to increase the cost to the Bank of making or
maintaining loans hereunder, then the Bank shall notify the Borrower in writing
of the additional amount or amounts necessary to compensate the Bank for such
additional costs. A certificate of an officer of the Bank setting forth the
calculation of such costs shall be conclusive and binding, absent manifest
error. In the event the Borrower is unwilling to pay such additional costs,
during the thirty days following the receipt of such notice, the Bank and the
Borrower shall negotiate in good faith with a view toward modifying this Note
to provide a substitute basis for the interest rate provided above which is
financially a substantial equivalent of such rate. If, within such thirty-day
period, the Bank and the Borrower shall agree in writing upon such substitute
rate, then such substitute rate shall be retroactive to, and effective from,
the date of the aforesaid notice. If, within such thirty-day period, the Bank
and the Borrower shall fail to agree in writing upon such substitute rate, the
Borrower agrees that this Note shall bear interest retroactive to, and
effective from, the date of the aforesaid notice at a rate equal to the rate
reported by The Wall Street Journal in its column "Money Rates" as the prime
rate (the "Prime Rate"). If more than one rate or a range of rates is reported,
the Prime Rate shall be the higher or highest such rate. In the event The Wall
Street Journal fails to report a prime rate, the Prime Rate shall mean that
rate announced from time to time by the Bank as its prime rate of interest. The
Prime Rate, determined in either manner, is not necessarily the lowest rate
charged by the Bank on loans.


                                       3

<PAGE>   12


         6. Right of Setoff.    Unless this Note be paid at its maturity, or
when otherwise due, as herein provided, the Bank shall have all setoff rights
provided by law.

         7. Waivers and Consents. Except as otherwise expressly set forth
herein, the Borrower and all endorsers, guarantors, and sureties of this Note
(collectively the "Obligors") severally (a) waive all applicable exemption
rights, whether under the laws of the District of Columbia or otherwise, and
also waive, presentment for payment, protest, notice of protest, and diligence
in collecting this Note, (b) agree to the release of any party primarily or
secondarily liable hereon and agree that it will not be necessary for any
holder hereof, in order to enforce payment of this Note by any party, to first
institute suit against any other Obligor, and (c) consent to any one or more
extensions or postponements of time of payment of this Note on any terms or any
other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY
OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION
HEREWITH, IS HEREBY EXPRESSLY WAIVED.

         8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be
a contract under the laws of the District of Columbia (except for the conflict
of law provisions thereof) and shall be governed by, and construed in
accordance with, the laws of such jurisdiction. Wherever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note. If any
action arising out of this Note is commenced in any District of Columbia or
Federal court located in the District of Columbia, each party signatory hereto
hereby consents to the jurisdiction of any such court in any such action and to
the laying of venue in the District of Columbia. Any process in such action
shall be duly served if mailed by registered mail, postage prepaid, to the
Borrower at its address given herein or its last known business address, or if
otherwise served in acceptance with law. Any other notice or demand hereunder
may be made by hand delivery or certified or registered mail, return receipt
requested, to such address, with the same effect as if delivered in person.

         9. Incorporated Provisions. This Note is the ACFC Note referred to in
an Unsecured Line of Credit Agreement dated as of the date hereof, between the
Borrower, Allied Capital Corporation, Allied Investment Corporation, and the
Bank (the "Credit Agreement"), is subject to payment and acceleration upon the
terms specified therein, and hereby incorporates by reference all of the
provisions thereof.

ALLIED CAPITAL FINANCIAL CORPORATION

By:/s/ G. Cabell Williams, III
   ------------------------------------
Name:   G. Cabell Williams, III
Title:  President

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