Practically every person around the world is familiar with the concept of debt. Individuals, small businesses, families, and even large corporations enter into debt agreements for various reasons. Economies of some countries, such as the United States of America, are successfully built on a debt structure. It is, therefore, not a new concept to most people. And the rules guiding any debt situation are practically the same: the lender grants the loan request of the borrower and gives them some money, after which both parties agree that the money shall be returned on a particular date.
Legally, in order to assure a lender that a debt will be repaid, the borrower will often need to prepare a document known as a promissory note. It is a debt instrument that is valid and is often used in various parts of the country, including California. However, for any borrower or lender, if you’re thinking about preparing or issuing a promissory note in California, this article provides a quick guide.
What is a Promissory Note (California).
If you’re a resident of California, or a small business operating from the city, there may be a need to prepare a promissory every now and then. Therefore, before proceeding to download or use just any promissory note template, California residents should understand the nature and purpose of the document, as well as some of its fundamental features.
A promissory note can be generally described as a legal and financial instrument issued by one party that promises another party to pay a debt on a specific date. It is a written and signed agreement, promising to pay the money on a given date or whenever it is requested. Therefore, given this definition, if both a lender and a borrower happen to both reside in California, promissory notes will be a good option to seal the agreement between both parties. It creates a legal obligation on the part of the borrower, which ensures that the loan is repaid on the agreed date.
Now, let’s examine a few types of promissory notes.
Types of Promissory Notes
- Personal Promissory Notes
When a promissory note is said to be personal, it is usually written for a loan obtained from family or friends. As a category of promissory note, California residents often prepare personal promissory notes upon entering into domestic loan agreements. Although most people tend to avoid drafting legal documents in domestic settings, a personal promissory note signifies that the borrower truly intends to repay the loan. It also strengthens the lender’s belief and trust in the borrower’s intentions.
- Commercial Promissory
This applies to situations where the loan is from a commercial lender such as retail banks, microfinance banks, or other lending institutions. In these cases, the institution themselves require the borrower to prepare a promissory note or fill a form prepared by the bank itself. The majority of commercial promissory notes are similar to personal notes.
- Real Estate
Real estate issues relate to commercial promissory notes mostly when it comes to non-payment. For example, if the borrower defaults, the other party is able to hold the estate until the debt is paid off. In California, this is a standard option adopted by the banks. Although, it may be a bit risky for the borrower because all of the information becomes public, which can then harm the borrower’s credit record in the future.
Sometimes, a promissory note can also be used for fundraising, whether for a small or medium businesses. How this operates is that a business owner will prepare a promissory note for a potential investor, with the intention that the loan will be used to fund a business. The lender is then assured that the loan will be repaid in certain instalments. The note also contains other terms and conditions regarding the lender’s (investor’s) returns. When trying to raise business funds through a promissory note, California residents should definitely consider this option.
What Should We Include in a Promissory Note (California).
When preparing a California promissory note, the same general guidelines apply if you intend to draft a promissory note in other locations. However, there will be certain distinct features and information that will be peculiar to your circumstances and your contractual situation.
A simple promissory note is expected to contain certain basic features. When you download any pdf sample or acquire any prepared document, it is extremely vital to ensure that the fundamental features are contained in the final version of your promissory note. Let’s highlight some of these essential features:
- A Written Agreement (Printable or Printed)
Due to the importance of a promissory note, it is advisable to put all the necessary details in writing. This way, the terms are clear and the parties know what is expected of them.
- Clearly Defined Amount
A promissory note essentially contains a promise to pay money at a specific time or when it is demanded. As a result, the amount stated in the promissory cannot be changed, added to, or subtracted from in the future.
- The Signature of Parties
This aspect of the promissory note signifies the attestation of both parties. The document should duly contain the signature of both parties, and when possible, it should be duly stamped.
When a promissory note is prepared, the promise to repay a certain amount to the lender must be absolute. There must be no conditions to which the promise is subject to, or the promissory note becomes invalidated.
- Legal Composition
The payment indicated in the promissory note should be the country’s recognised legal tender/currency. In California, the acceptable currency is the United States Dollar (USD).
- Detailed Information
Finally, the note should have all the required information, which include the name of both parties, additional terms of repayment, the issue date, and maturity date. If applicable, the promissory note should also contain the principal amount and interest rate. And of course, all promissory notes must contain the signature of the parties.
How to Write a Promissory Note (California)
A promissory note must be drafted in a way that includes the obligations of the borrower and the rights of the lender. In any sample promissory note, California lenders and borrowers can find the basic aspects of a promissory note. Of course, there is no fixed sample of a promissory note, which is why parties must ensure to include all the important non-negotiable parts. Therefore, let’s highlight some of these parts that must be included in a promissory note.
- Start date of the document
Parties must include the start date of the document, which is a fundamental aspect of any kind of contract.
- Borrower’s name and mailing address
The full name of the borrower, who is making an undertaking to repay a loan, must also be included in the promissory note. Their permanent address must also be expressly stated, for mailing purposes, among others.
- Lender’s name and mailing address
The full details of the lender should equally be expressly included. That way, both parties to the contract and their valid details are well defined.
- Principal Amount
Since the promissory note is being created due to a loan, the principal amount, which is the amount of the loan, must be clearly stated. This establishes the fact that the lender has provided the borrower with an amount which must be repaid.
Frequently Asked Questions
What does a Promissory Note Generally Contain?
A promissory note is a type of debt instrument that represents the issuer’s written promise to repay another party. A promissory note will include the terms agreed upon by the two parties, such as the date of maturity, the borrowed amount, the interest (if any), and signature.
What is a typical example of a promissory note?
One typical example is a corporate credit promissory note. In this case, a business will typically seek a short-term loan, which makes it the borrower. For small businesses that are running low on cash and need to expand, the terms of the agreement could state that the loan will be repaid once the company’s accounts receivable are obtained.
Where can I get a promissory note sample?
Regardless of where you live, you can always get a promissory note sample to work with by making a quick internet search. For instance, when in need of a promissory note pdf, California residents and business owners can download free samples online and adjust the details to fit their particular circumstances. Overall, it is always advisable to involve a lawyer for one.
The importance of a promissory note cannot be understated. It is an important form of agreement recognized by national and international laws and bodies, such as the United Nations. While it is mostly used by financial institutions, individuals and small businesses also have the opportunity to protect their rights and interests by preparing simple promissory notes when they make loan agreements.
With over 20 years of experience as a finance lawyer, I have dedicated my career to simplifying complex financial relationships for individuals. I’ve prepared materials that will help you navigate financial transactions with ease, and I’m committed to ensuring that you have the knowledge and tools necessary to make informed decisions.