Advertisement

What is a promissory note?

Advertisement

In the economic sphere, there are several mechanisms that can fulfill the promise of payment function . These types of documents are various and one of the most used is known by the name of promissory note , which includes a series of conditions that make the debtor acquire an important commitment before the creditor , including the way in which the money will be canceled and the time it may take to pay off the debt.

Advertisement
What is a promissory note?

promissory note is a type of document of title of credit that makes a monetary commitment formal in which it is carefully indicated who must pay whom, the amount of money that will be loaned and the exact date in which the amount must be cancelled.

Advertisement
  • features
  • Source
  • History
  • What is it for
  • Types of promissory note
  • Elements
  • How does it work
  • How to fill out a promissory note
  • Advantage
  • Disadvantages
  • How it differs from a check
  • Importance
  • Example

features

The main characteristics that distinguish the promissory note are the following:

Advertisement
  • It establishes a commitment type formally by the person signing the promissory note and another that is the beneficiary.
  • The payment of the promissory note must be established with currencies that are legally admitted .
  • In the promissory note, three fundamental aspects must be found, the first is the issuer (the one in charge of paying the amount of money that has been agreed), the beneficiary (who receives the amount) and the guarantor (a third person who has the function to guarantee the way in which the amount that has already been agreed will be paid).
  • It is literal since it must be done following a series of guidelines that have been agreed within the document.
  • It can be transferred , in other words, the beneficiary of the promissory note can change and it will be this one who is in charge of demanding payments.
  • It is an abstract type document since it can always be charged unless the original document is destroyed or lost .
  • To be valid, it must also be tangible .

Source

The term promissory note has a history dating back to at least the 18th century and at that time it was considered an informal written agreement and not a legally binding commitment.

History

The promissory note began to gain greater strength and importance in the Middle Ages , mainly in the cities that were located in northern Italy , before the bill of exchange emerged. It was created with the main objective of being able to carry cash when on the way it was common for thieves to appear , then, it was a way to deliver the money safely at its destination , mainly to the bankers who then signed the document to return it to the person who gave it to him.

What is it for

The promissory note is a document that serves to ensure and attest that a certain amount of money will be paid when it is requested to purchase a financial product or service. It is a mechanism through which the parties involved can reach a positive agreement between both of them where the conditions are established so that the document is safe and does not lose confidence.

Types of promissory note

Depending on the function of the promissory note, it can be classified into different types which are mentioned below:

  • I will pay to order : in this case, the document gives freedom to the holder so that he can endorse the title to a third party, at the same time giving him all the rights to execute it and to collect it.
  • Promissory note not to order : this type of promissory note is not endorsed but despite this, it manages to maintain the ability to be transmitted through a formula known as assignment of credit.
  • Bank : these promissory notes are those that are printed in a bank and have their own format, which is very similar to a check .
  • Non-bank : in this case, the companies are responsible for issuing the promissory note.
  • Truncable promissory note : these documents have a barcode on the bottom and can be charged without the physical document being delivered, for example, current electronic means can be used to make the payment.
  • Non-truncable : this type of promissory note should not necessarily be guarded as it can only be collected when it is physically delivered to the corresponding bank.

Elements

To be valid, the promissory note must have a series of fundamental elements which make it functional. These elements are:

  • The mention that the document is a promissory note , this must be inserted within the text of the document.
  • The promise so unconditional to be paid the total sum has been paid.
  • The full name of the person who is to receive the payment.
  • The place where the promissory note should be paid.
  • The date and place where the document is signed.
  • The signature of the subscriber .
  • The debtor or drawee and the creditor or the drawer .

How does it work

The promissory note works as a title of credit by means of which it is possible for a person to unconditionally assume the obligation to pay another person a certain amount of money in a fixed term . Only two individuals intervene in it, the subscriber and the beneficiary.

How to fill out a promissory note

One of the most important aspects of the promissory note is that these documents must be filled in correctly because if it is not done this way, the document will be invalid and will not be covered under the legal framework . There are several aspects that must be completed, among them we mention:

  • Amount : this is the amount that must be paid and must be written in numbers and letters , the amount that is written in letters must be enclosed in parentheses so that it cannot undergo subsequent modifications,
  • Due date : the date on which the payment must be made must be indicated , if this payment is in installments then the payments to be made must be specified.
  • Name of the beneficiary : the full and correct name of the name of the person to whom the amount will be made must be entered when the expiration date has arrived.
  • The place of payment must also be filled in exactly, you can put the name of the city or you can write a more specific address.
  • Should include the percentages of interest annually that the debtor will have to pay when it delayed the maturity date of the promissory note.
  • The word promissory note must be placed in the document and the signature of the beneficiary and the debtor must also be filled in on the document.
  • If it is a bank promissory note , the IBAN account and the client account must be included .

Advantage

One of the main advantages is that by means of the promissory note, companies manage to get the necessary money to later pay the amounts they generate. In addition, companies that make the promise of payment under legal guarantees have the ability to include in the promissory note interest for late payments, which in the end results in an increase in the final amount that will be charged.

It is a document that makes it possible for people or companies to acquire financing from banks . They are documents binding from the point of legal terms and this enables them to be afforded legal means to be collected. They are very flexible instruments , they can even be endorsed or traded very easily.

Disadvantages

Among its disadvantages we can mention that the promissory notes can only be collected once the due date has arrived , this wait, if it is too long, can put the owners of the promissory note at risk in terms of liquidity . You must also be very aware of the collection management to be able to attend the exact day and in the right place to be able to collect it. There is also a great risk of default .

How it differs from a check

The main difference that exists between these two documents is the collection date , while the check can be cashed at the same time it is drawn up, the promissory note has a place and a specific date so that it can be cashed. In checks, there will always be intervention by a bank , however in the promissory note no. In addition, the benefits of the promissory notes must be issued specifically to a legal or natural person while the checksthey can be issued to the bearer .

Importance

Promissory notes are important because they represent a way to record the details of a loan or to collect money that has been loaned within a specified period of time. They can be used to buy homes, personal items or even to pay debts.

Example

Some examples of promissory notes are mentioned below:

  • I will pay with a guarantee that allows a second person to respond to the principal debt.
  • I will pay with interest in which a certain amount of money is added in case the payment is late for any reason.
  • I will pay with multiple maturities where the total debt can be divided into several payment terms.

Leave a Comment