Legal Definitions - Promissory note

A promissory note is a formal, written promise by one party (the "maker") to pay a specific sum of money to another party (the "payee") on demand or by a specified future date. It serves as an unconditional commitment, meaning the payment is not dependent on any other event or condition. For it to be legally valid, the note must be in writing, clearly state the exact amount owed, and be signed by the person or entity making the promise to pay.

Here are a few examples to illustrate how a promissory note works in different situations:

• Example 1: Personal Loan Between Friends

  Imagine Sarah lends $7,500 to her friend, Mark, to help him cover unexpected medical expenses. To ensure clarity and a formal agreement, Mark signs a promissory note stating that he unconditionally promises to pay Sarah $7,500 by a specific date next year, perhaps with a small agreed-upon interest rate. This written and signed document serves as Mark's legal promise to repay the exact amount to Sarah, providing both parties with a clear record of the debt and repayment terms.

• Example 2: Small Business Funding from an Investor

  A new tech startup, "Innovate Solutions," needs $100,000 to develop its initial product. Instead of seeking a traditional bank loan, they secure funding from a private investor, Ms. Evelyn Reed. In exchange for the investment, Innovate Solutions issues a promissory note to Ms. Reed. This note, signed by an authorized representative of the company, promises to repay Ms. Reed the $100,000, plus a predetermined interest, by a specific maturity date. It acts as a formal acknowledgment of the debt and the company's commitment to repay the investor.

• Example 3: Seller-Financed Purchase of Equipment

  A small landscaping company, "Green Thumb Services," wants to purchase a new, expensive commercial mower from a supplier, "Outdoor Gear Inc." Green Thumb Services can't pay the full $20,000 upfront. Outdoor Gear Inc. agrees to allow Green Thumb Services to pay $5,000 upfront and the remaining $15,000 in monthly installments over the next year. To formalize this arrangement, Green Thumb Services signs a promissory note for $15,000 payable to Outdoor Gear Inc., detailing the installment amounts and due dates. This note ensures that Green Thumb Services has a clear, written obligation to pay the remaining balance for the equipment.