Promissory notes are written agreements acknowledging a debt and promising to pay the debt within a given time period. Since it is legally binding, it needs to be authored in the right way so that it will indeed stand up in court. These are the best practices for promissory notes.
Promissory notes are not so different from loan agreements except for the fact that they are mainly written by the borrower instead of the lender. With that in mind, here’s what must be included:
Names of Parties: The first paragraph will include the name of the debtor as well as their address. The creditor's full name should also be included along with their address.
Acknowledgment of Debt: The first paragraph is about acknowledging that money is owed and that you have the intention to pay this money. So, the debtor identifies themselves by full name and then acknowledges that they owe a particular sum of money to the other party whom they also identify.
Date of Repayment: The acknowledgment should be accompanied by a promise to pay the money on a particular date.
Interest: If an interest has to be paid on the money owed, then that should also be included in the promissory note. There should also be an indication of the total sum after interest is added.
Collateral: The debtor mentions the collateral provided as a guarantee that the money will be paid. This could be a list of items or services that have been valued.
Default Conditions: Explain what actions will be taken if the debtor fails to meet their obligation within the set period.
Mode of Payment: Will the payment be made in cash? Paid to the bank? Check or any other method? This should be indicated along with where the payment should be made in case of payments made to the bank.
Signature: The signature enforces the agreement. Both parties will have to sign and date the signature for it to be a legally binding document.
If a lender loses a promissory note, it can be hard to follow up on the payment. The best practice is to store the document in digital form. This prevents loss as well as access to the document by unauthorized persons.
Although it may seem easy to quickly draft a short note by hand, the best option would be to rely on templates that are professionally designed. It makes it faster to create the document and avoids errors or omissions that will complicate the agreement.
Keep it short and to the point. There is no reason to include unnecessary clauses that may already be covered. Most businesses today automate this process for faster and better results.
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