Overview of Promissory Note

 

What is this document?

A promissory note is a promise to pay money.

 

When would I use this document?

Promissory notes can be used whenever one person owes another person money, and the person who is to receive the money wants some security that the money will be paid. Common situations include repaying a loan, or paying for the purchase of an asset.

 

Who signs this document?

The person paying the money signs the promissory note.

 

More details about this document

A promissory note is a written promise to pay a defined amount of money (called the ‘principal’ or ‘principal amount’) at a certain time. The person promising to pay the money is called the ‘maker’ or ‘promissor’ and the person to whom the money is to be paid is called the ‘holder’ or ‘promisee’. If the promissory note is used with a loan document, the maker might also be referred to as the debtor, and the holder as the lender or creditor or other similar titles. The note must contain enough information on its face for a holder to be able to calculate the amount of money to be paid and the date on which it is to be paid.

Promissory notes are negotiable, which means the note can be sold or transferred and then enforced by any person who has acquired the note in good faith and for value. Generally speaking, a holder can sue to enforce the note without having to enforce the underlying contract (eg. a loan agreement or an agreement of purchase and sale).

Promissory notes range in length from a very simple and short promise to pay, to long and complex documents. Promissory notes are often used in conjunction with loan agreements and agreements for purchase and sale. If the maker is a corporation, a promissory note may also be used as an investment vehicle and be convertible into securities of the corporation in lieu of a payment of money.

 

What are the core elements of this document?

The core elements of a promissory note include a promise to pay, definition of the principal, and a due date. Other essential clauses include a date or effective date of the promissory note, and execution lines for the maker of the note, and a notice clauses.

Promissory notes also often contain the following clauses: waiver of presentment, negotiable instrument, payable on demand, interest rate, schedule of interest payments, schedule of payments, events of default, cure period, remedies, acceleration on default, method of payment, principal is secured, collateral as security for default.

If the promissory note is convertible, it may also contain the following clauses: optional conversion, automatic conversion, conversion event, conversion rate, obligation to issue securities, representations and warranties.

 

Related Documents

Note: Because promissory notes are widely used, these are some examples of related documents:

Loan Agreement – an agreement that sets out the terms of a loan

Convertible Promissory Note Financing – Standard Term Sheet – a document that sets out the basic terms for an investment in a promissory note that is convertible to other securities eg. shares

Credit Agreement – a type of loan agreement that provides for a maximum amount of credit available to be used by the borrower when needed over a defined period of time

General Security Agreement – an agreement that grants a security interest in collateral to ensure the repayment of a loan or other debt

Asset Purchase Agreement – an agreement for the sale of the assets of a business

Share Purchase Agreement – an agreement for the sale of shares

Bridge Loan – Demand Promissory Note – a promissory note payable on demand (rather than on a specific date) that can be used eg. for a bridge loan

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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