A promissory note is a written promise to repay a specific amount of money, typically with interest, by a specified date, serving as a formal IOU between parties.
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Last Updated: February 16, 2026
New and aspiring business owners encounter many new terms, and a common one is the term “promissory note.” Some entrepreneurs might recognize this term from taking out a personal loan or buying a house, but many people have never dealt with promissory notes before. Thankfully, this guide walks through the basics of what a promissory note is in the business world, including what it is and how it works.
According to Merriam-Webster, a promissory note is “a written promise to pay at a fixed or determinable future time a sum of money to a specified individual or to bearer.” The rest of this guide will break down precisely what that means, but essentially, a promissory note is a legally binding agreement between a borrower and a lender. The promissory note represents a promise by one party to repay a certain amount of money within a particular time frame to another party.
There are many situations in which entrepreneurs might encounter a promissory note. For example, promissory notes are commonly used for:
No matter the precise scenario, a promissory note can be a great way for professionals to protect themselves when lending or borrowing money.
A promissory note is a legally binding agreement. However, it’s only as effective as its terms allow it to be. Thus, it’s imperative to be as detailed as possible in drafting a promissory note.
Important terms to include in a promissory note frequently include:
Lastly, it’s essential to obtain signatures of all parties. These signatures confirm their agreement to the terms of the promissory note; they’re essential to creating a legally binding and enforceable agreement.
There are many benefits of using a promissory note when lending or borrowing money.
Importantly, promissory notes clearly set forth the terms and conditions of repayment so that all parties are aware and in agreement. This, in turn, can help to prevent disputes between the borrower and lender in the future. Additionally, it can clarify how to handle issues such as late payments, failure to pay entirely, and other disputes if and when they arise.
In short, there are many advantages to promissory notes. Likewise, there are lots of situations in which an entrepreneur might encounter one.
Thus, when in doubt, it’s usually a great idea to have a written agreement in the form of a promissory note when borrowing or lending funds in the course of running a limited liability company, corporation, or any other legal entity type.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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