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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As a new or aspiring business owner, you will likely hear the term “promissory note” at some point in running your small business. And in fact, you may already have some familiarity with the term from your personal life, such as taking out a loan to buy a house.
But if you’ve never had to utilize a promissory note, you may not know exactly what it is or how it works.
Want to learn more about the promissory note business definition? Use our guide below to get the information you need for your small business.
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.” If that definition sounds complicated, don’t worry. We’re here to help you break it down.
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.
Here are a few important things to remember when it comes to promissory notes.
There are many situations in which you may come across a promissory note. For example, promissory notes are commonly used for:
No matter the precise scenario, a promissory note can be a great way to protect yourself 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, be sure to obtain signatures of all parties confirming their agreement to the terms of the promissory note. These signatures are 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 promissory note advantages and situations in which you may come across 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 your 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. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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