What Is a Promissory Note?
A Promissory Note is a written promise to pay a specified amount of money on demand or within a definite timeline. Notes receivable give the payee a stronger legal claim to assets than accounts receivable. They may be used when -
- individuals and companies lend or borrow money,
- the amount of the transaction and the credit period exceed normal limits, or
- in settlement of accounts receivable
Understanding the Promissory Note
On a promissory note, the party making the promise to pay is called the “Maker” and the one to whom the payment is to be made is called the “Holder” or “Payee”. The note may specifically identify the payee by name or may designate the payee simply as the bearer of the note.
Promissory notes are negotiable instruments (as are checks) which means that they can be transferred to another party by endorsement.
Example
For example, a promissory note is a short-term financing instrument given by a debtor (called the promisor) to a creditor (called the promisee) as a legal and binding promise to repay a certain sum of money at a future date, usually, with interest at a fixed rate.
Use of the Term in Sentences
- The firm issues promissory notes to its debtors and has built a reputation to have always repaid the debts in time.
- Promissory notes may seem like mere courtesies but they are legal bonds and the promisor must pay within the time mentioned in it or legal actions can be taken against them.