Legal Definitions - note receivable

A note receivable is a formal, written promise from one party (the debtor) to pay a specific sum of money to another party (the creditor) by a certain date or over a period of time, often including interest. It represents a legally enforceable claim that the creditor has against the debtor for future payment. Unlike a simple invoice for goods or services (which might be an account receivable), a note receivable is typically documented by a promissory note, which outlines the precise terms of repayment, interest rates, and maturity dates, making it a more formal and legally structured debt instrument.

• Example 1: Business Expansion Loan

  A small manufacturing company seeks to purchase new machinery to increase production capacity. Instead of securing a traditional bank loan, they arrange financing directly from the machinery supplier. The supplier requires the manufacturing company to sign a promissory note outlining the principal amount owed, the agreed-upon interest rate, and a monthly repayment schedule over three years. For the machinery supplier, this signed promissory note is a note receivable, representing a formal, legally binding promise from the manufacturing company to repay the debt with interest.

• Example 2: Private Real Estate Sale

  An individual sells a piece of undeveloped land to a developer. The developer makes a down payment but needs to finance the remaining balance directly with the seller because traditional bank financing is not immediately available for that specific type of land. The seller agrees to this arrangement, and the developer signs a promissory note promising to pay the outstanding balance, plus interest, in quarterly installments over five years. This promissory note held by the seller is a note receivable, documenting the developer's formal obligation to make future payments for the land.

• Example 3: Inter-company Financing

  A large corporation's subsidiary needs capital to launch a new product line. Rather than seeking external financing, the parent company provides the necessary funds. To formalize this internal transaction and ensure clear accountability, the subsidiary issues a promissory note to the parent company, detailing the loan amount, a competitive interest rate, and a structured repayment plan. For the parent company, this promissory note is a note receivable, representing a formal claim against its subsidiary for the repayment of the loaned funds according to the agreed-upon terms.