What is Promissory Note?
The Short Answer
Promissory Note explained simply
A Promissory Note is like a formal IOU. It’s a legal document where one person or company promises to pay another person or company a specific amount of money. It clearly states how much is owed, when it needs to be paid back, and if there’s any interest involved. These notes are common in business sales when the seller helps finance part of the purchase.
Real-World Example
Seller Financing a Business Sale
Let’s say a buyer wants to purchase a business for $500,000. They have $400,000 in cash, but need to finance the remaining $100,000. The seller agrees to finance this amount. They would create a Promissory Note for $100,000, outlining an interest rate (e.g., 5%) and a payment schedule (e.g., monthly payments over 3 years). This note legally binds the buyer to pay the seller back.
Why this matters
Promissory Notes are important because they provide a clear, legally binding record of a debt. For sellers, it ensures they will be paid. For buyers, it clarifies their payment obligations. It’s a key tool in seller financing, making deals possible when traditional bank loans aren’t an option.
Always make sure the Promissory Note clearly states all terms: principal, interest, payment schedule, and what happens if payments are missed. Get legal advice to ensure it protects both parties.
Always make sure the Promissory Note clearly states all terms: principal, interest, payment schedule, and what happens if payments are missed. Get legal advice to ensure it protects both parties.
Need expert guidance?
Don't navigate the buying process alone. Connect with a verified expert to help you find and close the right deal.
