by Fraser Sherman
A promissory note is a contract, a binding agreement that someone will pay your business a sum of money. However under some circumstances – if the note has been altered, it wasn’t correctly written, or if you don’t have the right to claim the debt – then, the contract becomes null and void. If you want to collect what you’re owed, you have to avoid the potential legal pitfalls.
Promissory Note Basics
An IOU is not a promissory note. An IOU is basically: I owe your business (or other person or entity) something, usually something of valley, and most likely, money. For example: “I owe your business $500.” A promissory note has more meat on the bones: it includes the dollar amount, the names of both parties, the rate of interest and the timeline for paying back the money. If there’s collateral involved, the note identifies the collateral.
If someone buys supplies from you on credit, the note may be pretty simple; if they’re taking out a mortgage, the note will be more complex.
Promissory notes are not attached to one person or business. If you have a customer’s note, you can legally sell it or you can exchange it with someone else. That person is then entitled to collect on the debt. Whoever holds the note – but it’s only valid if certain conditions are met.