If your company failed to control its expenses and ended up in debt, a promissory note can be a great alternative to settle these debts.
-
- What is a promissory note?
- How does a promissory note work?
- What are the advantages of using a promissory note?
- How do I make a promissory note?
- Come learn more with us!
Shall we begin reading?
What is a promissory note?
A promissory note is a document that guarantees the promise to pay a debt. It is a credit instrument used to purchase goods and services, with the aim of settling the debt with the creditor.
Although this type of document is not used very often outside of a business environment, it is still part of that environment and needs to be recorded within the cash flow.
Therefore, promissory notes are commonly used within the business environment of corporate finance , especially in those related to the commercial sector.
There are laws that protect this document; that is, if the debtor fails to pay the bill after signing it, their name will likely be protested, and they will subsequently be required to pay the debt .
If the debt is not paid, the creditor may take legal action against the debtor through small claims court.
How does a promissory note work?
As we saw earlier, a promissory note is a record of a debt, with a promise of payment by the debtor. This document, when properly signed, has legal value and can be enforced through legal action.
A promissory note operates with two main elements:
-
- Issuer or subscriber : this is the person who assumes the debt.
- Beneficiary or payer : this is the person who will receive the agreed-upon amount.
It’s possible that many people accustomed to contracts and other documents find promissory notes to be somewhat informal . However, this document is part of the daily routine of many businesses and is sometimes also used between individuals,
Furthermore, this is one of the main documents for formalizing monetary transactions that do not involve financial institutions and is accepted by the judiciary. It is worth noting that a promissory note is different from other credit instruments and may involve third parties other than the issuer and the beneficiary.
Because it is a simpler document, there are some advantages to using it, which we will discuss below.
What are the advantages of using a promissory note?
As we have seen, this document is highly relevant in business.
This is because promissory notes are legally binding and provide security for both parties.
Therefore, the main advantage is that it ensures the amount will actually be paid.
This document takes on even greater importance in negotiations involving large sums of money, legally guaranteeing that the borrowing party does not suffer losses or defaults.
It is also worth noting that promissory notes can serve as a way for debtors to demonstrate financial capacity, thus increasing their negotiating power.
In other words, it is a document that benefits all parties involved, even if in different ways.
Therefore, understanding how it works and taking certain precautions when registering is essential for anyone wishing to trade using this document.
Ultimately, a promissory note has its advantages, but to take advantage of them, it’s necessary to understand how it works and how to incorporate it into good financial management practices in a business.
It’s worth noting that risk management can be a great way to prevent your company from reaching the point of issuing a promissory note.
However, if you or your company find yourself in this situation, issuing a promissory note can be a great alternative , and even if not, it’s important to have this knowledge in case it becomes necessary someday.
For this reason, we’ve dedicated the following section to explaining how to create a promissory note. Shall we take a look?
How do I make a promissory note?
Basically, there are two ways to issue a promissory note. The first is by filling it out on paper using pre-made forms found in office supply stores, or by creating a typed and printed document ; in this case, it is mandatory that the document has ” Promissory Note ” printed at the top.
Regardless of the format, it will necessarily need to contain certain information:
-
- Name, ID number, and CPF of the person who will pay the amount (this can be an individual or a legal entity);
- Total amount to be paid;
- Handwritten signature of the person who will pay or by proxy;
- Address;
- Name, ID number, and CPF of the recipient.
Without this information, the document will not be legally valid. It is important to emphasize that there cannot be any erasures and it must include an expiration date .
It is also necessary that the amount be written out in words, similar to what we see on checks.
It is also possible to find some types of pre-defined promissory notes on the internet.