Promissory Note Definition

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. 

Promissory Note Definition

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. 

Definition of Promissory Note Broken 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.

Promissory Note Examples: When You Might Need One

There are many situations in which you may come across a promissory note. For example, promissory notes are commonly used for: 

  • Real estate mortgages
  • Motor vehicle loans
  • Student loans
  • Personal loans between family members or friends

No matter the precise scenario, a promissory note can be a great way to protect yourself when lending or borrowing money.

Common Terms to Include in a Promissory Note

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: 

  • Names and contact information of the parties to the agreement
  • Total amount of money to be repaid
  • Description of collateral being used
  • Interest rate, if any
  • Repayment term and frequency of payments 
  • Details regarding late payments and penalties, if any

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.

Promissory Note Benefits

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.

Promissory Note Definition: The Bottom Line

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.

We Can Help

Running your own business requires a lot of hard work. Fortunately, we can take some of the more tedious items off your plate. 

When you have questions about promissory notes or any other common business terms, we’ll be there to help with all things small business and entrepreneurship. Check out our many products and services, and see how we can help you start, manage, and grow your business today.

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.

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Written by Team ZenBusiness

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