Borrowing 101: What Is a Promissory Note?

Whether you’re looking to get your business off the ground or you’re seeking funding to expand, you’ll likely need to borrow money at some point.

But before you can get your money, you’ll need to sign what’s known as a promissory note.

Keep reading to learn more about the basics of a promissory note, how you can create a contract of your own, and what happens if someone fails to live up to their end of the bargain.

What is a Promissory Note?

No doubt, the term ‘promissory note’ is a little intimidating. However, there’s a good chance you’ve signed one before — even if you weren’t aware of it.

A promissory note is a written document outlining the terms and conditions of a loan.

Promissory notes are commonly used in financial institutions like banks. However, individual loaners can use these documents, as well.

In short, they’re like an IOU except they’re legally binding as long as someone witnesses all parties sign the note. To make it “official,” you’ll also need to visit a notary public who can notarize the document.

Drafting a Promissory Note

Are you looking to create a promissory note? It’s easier than you might think!

By far, the easiest way to create a professional-looking note is to use a promissory note template. Using a template takes the guesswork out of formatting your document. Plus, if you use a template from an online service, you’ll ensure that the agreement is, indeed, legally binding.

Whether you go through an online service or write your IOU down on a napkin, you’ll need some information. Make sure you have:

  • The names of all parties
  • The date the transaction takes place
  • A description of the item or service sold
  • Payment details including
    • Total amount of payment
    • Fees, such as interest
    • Payment schedule
    • Penalties for failure to pay

Remember, you’ll need specific information, especially when it comes to payment dates.

Legal Ramifications

No one creates or signs a promissory note hoping it results in a lawsuit. However, that is a potential outcome. The good news is that since your note is a legally binding contract, it’ll hold up in court without an issue.

But before you take the other party to court, it’s important to understand that there are a few things that can render a promissory note void.

You’ll need to bring in the original note and prove ownership of the money loaned/item sold. If you can’t provide either, you won’t have a case.

Likewise, if there are any issues with the note such as faulty information — or even a typo — the court can rule against the lender.

Stay Smart, Get Paid

Even if you trust the person you’re lending to (or borrowing from), it’s always best to have a promissory note. They keep all parties honest and ensure everyone has clear expectations of any consequences that may arise should the borrower fail to pay.

For more information on running your business and securing funding, check back with our blog.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.