What is a Promissory Note and How it is used in Business?

A promissory note is a contract detailing the terms of a promise by one party to pay a sum of money to the other. If there is a product that one person wants, but cannot pay for in full, a promissory note is a great solution. With promissory notes, there is always a pre-determined, set date for when and how the money should be paid. Though some documents in the business world need to be notarized to be acknowledged by a court, it is not imperative to have a promissory note notarized. It will be upheld in a court of law even if it is not notarized.

The information included in promissory notes is going to be different depending on who is writing it, but there are some general components that are typically included in all promissory notes. Pertinent information that is usually included in a promissory note include the names of both the borrower and lender, the amount of money being lent, date that the lending took place, the due dates for interest or principal payments, how to make payments (i.e., the address where payments should be mailed), whether or not one can prepay the note, whether or not the borrower secured the note with their own assets, the laws that govern the specific transaction, whether or not another person or entity guaranteed the note, the interest rate, any late charges that could be incurred if payments are late, specifics about the maturity date being accelerated if payments are late or if the borrower breaches terms that are stated in the note, an area with details about the fees for the attorney (if applicable), and an area for signatures by both parties. Since an important part of a promissory note is a place dictating payment specifics, this is an area that should be written and read carefully before signing. First of all, the parties involved will decide on the type of payment methods, such as lump sum payments, equal monthly payments, or interest-only payments. These should be discussed in detail by both parties and the best option can be agreed upon. Once this is done, this specific payment information should be included as an important part of the promissory note. Both parties will sign the original promissory note document, and usually the person leasing will hold on to it until the lease is complete, upon which time the original will be returned to the lessee. It is wise to ask for a copy of the promissory note after you have signed it.

Using promissory notes is a very simple and quick way to document any type of loan. For something as simple as lending money to a friend, or even for a more professional type of loan, such as a debt consolidation loan from the bank, a promissory note is a great way to document the agreement. In the business world, a particular business may be looking to lease equipment, and the party that is leasing the equipment to the lessee could use a promissory note as a form of written documentation of the lease. Despite the fact that some people use oral agreements, it is always best to have some form of a written agreement in place when leasing. Promissory notes are an excellent option for leasing in business.

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