What is a Promissory Note?
A promissory note is a legal lending document indicating that an individual will repay a loan to his creditor on the specific date stated on the note.
While financial institutions sometimes use them, promissory notes are more common when a borrower is acquiring financing from an individual, such as a family member or friend.
Promissory Notes for Small Businesses
In the business world, promissory notes are often used to provide short-term credit. If, for example, a small company has sold goods or services, but has yet to receive full compensation for them, cash flow dwindles, and it might have difficulty managing its debts.
The company can ask its creditors to accept a promissory note, with the condition that they will pay the total amount they owe on the note in the future once their accounts receivables are collected. They can also ask a financial institution to accept a promissory note, taking out a temporary loan and paying it back once they have the funds to do so.
Promissory notes can also be a reliable source of short-term credit for companies that have already exhausted more traditional options like bond issues and corporate loans. This usually means, however, that the issuing company is more likely to default. It also means that the interest rate on the note will offer a higher return.
What is Included in Promissory Notes?
A promissory note sets out the repayment terms when you take a loan. They typically contain all the details of the loan, including:
- The names and addresses of the lender and borrower.
- The amount of money being borrowed and what, if any, collateral is being used.
- How often will payments be made and in what amount.
- The maturity date.
- Signatures of both parties, for the note to be enforceable.