A promissory note is a legally binding promise of payment. Occasionally referred to as a note payable, they are used to document and legally formalise the terms of a loan. Details such as the amount and the deadline for payment are included.
Promissory notes can be used for both personal and business loans and are a flexible way to specify how the loan will be repaid e.g. by a certain date, in instalments or on demand. You can define the terms of the loan to fit with your business requirements.
Unlike a Letter of Credit, the promise of payment is unconditional. Regardless of what happens between the borrower and the lender, even if the agreed service or contract did not occur, the amount detailed in the note must still be paid.
Secured or unsecured?
Generally, promissory notes are unsecured which means it is more like a formal IOU. However, lenders can request some security for the loan. For personal secured promissory notes, a house or car is often used as collateral. For businesses, company cars or offices can be offered.
Do your research
For businesses who are extending credit, especially small ones, it is important to check that the collateral offered is of the same value of the loan. It is also important to check that the same collateral hasn’t been used to secure other promissory notes.
What does a promissory note include?
A basic promissory note will generally include the following information although other terms and conditions can also be added:
- Name of lender and borrower
- Address of borrower
- Amount of money borrowed
- Length of loan period
- Whether you will charge interest and what the rate is
- Defaulting on loan and penalty information
- Whether it is secured or unsecured
- Signatures and witness signatures
Promissory notes are very basic and although they can include terms and conditions, they tend to be brief in length. Generally, they do not need notarisation, nor do they need to be recorded which makes them cost effective. It is advisory however, to consult with a lawyer if you include terms and conditions, if the amount being borrowed is for a large sum or if you are committing to a secured promissory note. Rules and regulations regarding promissory notes is different for each country, make sure you check what’s applicable to you.
Terms and conditions within a promissory note
Any unfair, unclear or bias terms and conditions cannot be included within a promissory note. If they are, they cannot be imposed, and the note will become void, especially if the note is disputed in court.
For more information on promissory notes or if you have a dispute, then get in touch. We will happy to help you.
