What Is a Promissory Note and How Is It Used in Business?

In the business world, it's common to seek mechanisms that ensure payments between parties. One of the most widely used instruments for this purpose is the promissory note—a legal document that supports a future payment commitment. While it's more common in commercial settings than between individuals, understanding how it works can help you manage your finances or protect your agreements.

In this guide, we’ll explain what a promissory note is, its key features, types, practical examples, and how to use it in your business or project.

What Is a Promissory Note?

A promissory note is a formal document in which one person (the issuer or maker) commits to paying a specific amount of money to another person (the beneficiary or holder) on a certain date. This promise to pay is unconditional, meaning it’s not subject to external or future conditions.

The term "promissory note" comes from the traditional phrase “I owe and will pay,” which used to open such documents. Today, its validity is supported by commercial laws such as the Bill of Exchange and Cheque Act (in Spain) or the Commercial Codes in various Latin American countries.

What Information Should a Promissory Note Include?

To be legally valid, a promissory note must contain several key elements:

• The word “promissory note” clearly written on the document
• An unconditional promise to pay
• The full name of the beneficiary or company receiving the payment
• The exact amount to be paid, in words and numbers
• Date and place of issuance
• Due date (when the payment must be made)
• Place of payment (city or financial institution)
• Original signature of the issuer

In some cases, it may also include a bank account number from which the payment will be made or where the money should be deposited.

How Does a Promissory Note Work?

The process is quite straightforward: the issuer delivers the document to the beneficiary, committing to pay the agreed amount on the specified date. Once that date arrives, the holder of the note can present it for collection.

If payment is not made, the beneficiary has the right to initiate a legal enforcement process, meaning they can demand payment without lengthy trials. This is why promissory notes are highly valued in commercial transactions—they represent strong legal guarantees.

Types of Promissory Notes

Promissory notes can be classified based on the issuer, the payment method, or the payment timing. Here’s how they are categorized:

1. By Issuer

• Bank promissory note: Issued from a booklet provided by a bank, often used by companies with financial agreements.
• Corporate promissory note: Issued by a company to guarantee payment to a supplier or third party.

2. By Payment Timing

• Fixed-date note: Payment is due on a specific date.
• At-sight note: Can be collected anytime after issuance.
• After-sight note: Payable after a certain time from the presentation date.
• Open-ended note: No defined due date, which may lead to legal issues.
• On-demand note: Payable immediately upon presentation.

3. By Payment Terms

• To order: Can be transferred to another person through endorsement.
• Not to order: Non-transferable; only the original beneficiary can collect.
• Crossed note: Can only be collected through a bank deposit.

Advantages of Using a Promissory Note

Promissory notes are highly useful for companies looking to structure financial commitments. Key advantages include:

• Legal security: Regulated by law, providing strong protection against default
• Access to financing: Can be used as collateral with financial institutions
• Contract formalization: Allows agreements without relying on traditional bank loans
• Transferability: If issued “to order,” it can be endorsed to a third party
• Enforceability: Enables fast legal claims in case of non-payment

What Happens If a Promissory Note Isn't Paid?

If the note isn’t paid on the agreed date, the holder can legally enforce payment. In many countries, promissory notes have executive force, meaning no prior judgment is needed to initiate enforcement. This makes them especially useful in business settings.

Additionally, the holder may issue a formal notarial protest, certifying that the note was presented for payment and was not honored. This is essential to preserve legal claims against the debtor.

In countries like Colombia and Spain, the right to collect typically expires three years after the due date.

How to Fill Out a Promissory Note Correctly

Incorrectly filling out a promissory note can render it invalid. Follow these steps:

• Clearly write “Promissory Note” at the top
• Indicate the issue and due dates
• Specify the place of payment
• Write the amount in words and numbers
• Include the full name of the beneficiary
• Sign the document legibly (no stamps or fingerprints)
• (Optional) Add details like a bank account number or specific clauses

What Is Promissory Note Discounting?

Promissory note discounting is common among companies needing liquidity before the note’s maturity date. It involves submitting the note to a financial institution, which advances the funds minus a commission fee.

This method allows quick access to cash without waiting for the issuer to pay. Although it has a cost, it can help improve cash flow.

Promissory Notes: Frequently Asked Questions

Can a promissory note be canceled after signing?
No, not unilaterally. Both parties must agree and sign a cancellation document.

Is a promissory note valid without a date?
No. A date is required to establish the due date. Without it, the document may be considered payable on demand or even invalid.

Can I use a promissory note in international contracts?
Yes, as long as the document is complete, translated as needed, and meets the legal requirements of the destination country.

What’s the difference between "to order" and "not to order"?
A “to order” note can be transferred to another person via endorsement. A “not to order” note is non-transferable and can only be collected by the original beneficiary.

Need Help Issuing Promissory Notes or Structuring Business Documents?

At Openbiz, we help you structure your business in the United States and establish legally supported commercial relationships. Whether you're issuing promissory notes, drafting contracts, or preparing business documentation, our team can guide you step-by-step to ensure your company is built on a solid legal foundation.

Contact us today and take the next step toward formalizing your business.

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