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What is a promissory note and how should it be written?

If you've taken out student loans before, then you've likely heard the terminology "promissory note" thrown around. You may not have heard of it used in the context of business operations though, but it operates much the same as it does in any other situation. Put quite simply, a promissory note is simply an "IOU" or a signed promise to pay someone that lended you money back.

Before any lender, whether it's a bank or a private investor, offers you any money, they'll have you sign a document outlining how much that you owe them, when payments are, what interest rates are and any penalties that may exist if you pay early or late. It may also list whether you had to put up anything as collateral to secure the loan.

Friends or family members that lend you money may even require you to sign a promissory note of sorts as some type of assurance that they'll get paid back.

For small loans, lenders generally only require a borrower to pay back the principal balance and interest. When someone borrows a larger amount of money, the person that the money is being loaned to will generally have to put up a compensating balance, or down payment, before they'll be given any funds.

Individuals who loan money to others shouldn't take their chances and do so without putting their agreement with their borrower in writing. A business organizations attorney can help you draft a promissory note so that it contains just the right language and information to ensure that it will hold up if necessary in a court of law.

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