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What are Promissory Notes

Promissory Notes

When businesses and corporations consider methods of obtaining credit, they often fail to acknowledge promissory notes. A promissory note functions on the same basic premise as loans and credit lines.

A lender will extend a loan to a borrower, based upon the understanding that the debtor will repay the lender for the loan. If an individual has a poor credit history, though, he/she may not be deemed creditworthy, and he/she may thus not be able to obtain a loan.

A corporation, meanwhile, must exhaust extensive financial resources in order to keep a business operating. In many cases, they will be granted numerous credit lines from a bank, and will also be unable to obtain any further loans. In these cases, a promissory note will allow a borrower to receive financial funds without the assistance of a bank or a credit union.

A promissory note is a legally binding agreement between a lender and a borrower. There are no restrictions on who is able to partake in issuing a promissory note. For example, these contracts may exist between individuals/consumers or businesses/corporations and their lenders. When an individual or a corporation is in need of funds, a lender will develop a promissory note.

This document will outline all of the details of an agreement, including the value of a loan and the duration of a loan. Promissory notes will also detail the payment schedule to which the debtor must adhere. A borrower may be required to make weekly payments, bi-weekly payments, or monthly payments.

Promissory notes will specify the amount of interest that the debtor will be expected to pay on a loan. Once the promissory note is drafted, it will have to be signed by both the lender and the borrower in the presence of a notary. The borrower will be provided with the specified loan, and he/she must ensure that regular and timely payments are made to the lender.

Both corporations and individuals may issue promissory notes. However, it is important that a lender be cautious regarding to whom they are granting these loans, as these financial agreements are not secured loans. If a borrower experiences financial difficulties, he/she will likely default on a promissory note before he/she fails to pay other debts. Therefore, it is essential that a lender be confident about the financial responsibility of borrower before a promissory note is issued.

If an individual fails to adhere to the terms of a contract, he/she may be required to attend a small claims court hearing. The judge will therein determine whether a borrower remains obligated to adhere to the conditions of the agreement. If the court orders a debtor to continue payments on a loan, he/she will be required to compensate the lender.

A lender should also research information regarding the registration of promissory notes, as loans for specified amounts and durations must be registered with the Securities and Exchange Commission.

NEXT: What Are Secured Bonds

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