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A promissory note is more than an IOU

On Behalf of | Jan 13, 2020 | Civil Litigation

When doing business in Virginia, cash flow is sometimes a problem. Some of the biggest and most successful companies are valued in the millions but struggle to keep cash in the business. This may result from the nature of the business and how often buyers are allowed to pay with promissory notes and other forms of credit. Promissory notes also come in handy for the business itself to prevent the need to pay for goods and services immediately.

According to Cornell Law School, a promissory note is a signed and written agreement that promises unconditionally to pay the holder of the note or a party named in the note. The note may determine how to deposit the money or when to pay. However, this document is more than just an IOU in the business world.

U.S. News cautions business owners to remember that it is a legally-binding document. In fact, promissory notes are often used in formal financing agreements, such as when regular customers get an auto loan or a mortgage. It is also popularly used to secure less formal arrangements, such as lending money to a business partner.

There are some criteria a promissory note may need to meet to be legally binding. Here are some of the most important things it should include:

  • The amount of money loaned or the amount owed
  • Whether the loan is secured or unsecured
  • The repayment schedule and interest rate
  • Details on any collateral offered
  • Signatures of both parties
  • The date

When the loan is repaid in full, many business owners believe that cancels out all their responsibilities. In theory, it might. However, it is wise to request a formal release of the promissory note or any other document showing that all obligations were met. This helps to protect business owners when companies change hands or if there is a falling out later on.