A Promissory Note is a simple agreement that records the terms of a loan to a company from an individual or a company. A Promissory Note is often used in place of a more complex loan agreement when the transaction is more informal or between related parties or is for a smaller sum of money.
There are many situations in which individuals (often friends and family, or perhaps directors or shareholders of a company) may decide to lend money to the company. The need may arise when the company is relatively new and cannot borrow from lenders because the company does not have a credit record or it lacks either assets or a trading history or, for a more established company, in times of financial difficulty when traditional lending sources are more limited.
A Promissory Note is a deliberately short agreement, since the parties are likely to be related. However, when properly drafted, it will contain the details of both the loan and plan to repay, including any deadlines or interest payment requirements. Even though the parties may be related or the sum of money may be small, you should still out the terms of the loan clearly in a Promissory Note to avoid future disputes.
When drafting a Promissory Note, it is important to focus on a number of key clauses, in particular: