Promissory Note

Promissory Note

The concept of a Promissory Note is simple enough – but under the hood this “IOU” often needs some complex legal requirements to help avoid disputes and creditors hounding you down the line.

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Promissory Note

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What is a Promissory Note?

It’s exactly what it sounds like! It’s a promise to pay someone a certain amount of money. It’s nothing as complex as long loan agreements, so it’s a quicker option for those who are owed small amounts.

It is similar to a cheque in that it can be endorsed onwards by the noteholder, in which case the debt is transferred along with the note.

When should I use a Promissory Note?

Use this document if you’re lending or borrowing money and need to document the terms of the loan.

What topics does a Promissory Note cover?

  • Definitions and interpretation
  • Lender and Borrower’s detail
  • Interest and repayment terms
  • Events of Default
  • Warranties from Borrower
  • Security
  • Responsibility for costs
  • Repayments of the loan amount
  • Interest
  • Fees and charges
  • Variations and waivers of rights
  • Governing law and jurisdiction
  • Notices and Service of notices
  • Severability
  • Whole agreement
  • Insurance
  • Confidentiality
  • Commencement and termination
  • Relationship of parties
  • Assignment
  • Powers, rights and remedies

What are the main decisions I need to make in creating a Promissory Note?

  • Do you want to include previous advances? You can use this form to record previous advances as a loan.
  • What is the applicable currency you would like to use? You can choose from a wide variety of currencies.
  • What is the drawdown limit and notice period? You can specify a minimum amount that can be drawn down each use and how much notice is required.
  • How much interest would you like to charge and how would you like to calculate it? There are several approaches that can be taken to calculate interest, this agreement will take you through the various options such as simple and compounding interest, the date when interest starts accruing and the frequency of compounding.
  • Do you want to include default interest? You can specify if you want to charge interest when there is a default and what that rate of interest is.
  • What are the repayment terms? You can specify the terms of repayment, including whether the lender can require repayment on demand, notice requirements and any other terms you’d like to include to customise your arrangement.
  • Is the debt secured? You can specify whether the debt is secured against any assets of the borrower. This document does not create any new security interests. If you need to secure the loan by taking security over any property, please obtain legal advice.

    Separate security documentation will be required – e.g. a Deed of Mortgage and/or a General Security Deed. It will also be necessary to consider whether any security interests should be registered on the Personal Property Securities Register. You can create a separate General Security Deed using the online form.

  • Who has responsibility for costs? The default position is that costs incurred in respect of the negotiation, preparation and execution of the agreement will lie where they fall – i.e. each side will be responsible for its own costs.  However, you can choose to:
    1. split those costs equally between the two sides; or
    2. make one side solely responsible for all such costs, including those incurred by the other side.

What other names does a Promissory Note go by?

A Promissory Note is also known as: 

  • IOU; 
  • Payment on Demand
  • Payment on Arrival
  • Note Payable
  • Bills of Exchange

Frequently Asked Questions

The Issuer is the party holding the Promissory Note who is to be paid.

The Noteholder is the party who owes the debt.

Typically, there is a single Issuer and a single Noteholder – however, if multiple entities are acting together, you can name up to 5 Issuers and up to 5 Noteholders.  If you name multiple parties on either side, they will hold their rights, and owe their obligations, jointly and severally

Generally, you would need this document when you are about to lend or borrow money and want to clarify the rights, duties and terms of the lender and borrower.

Promissory notes can be extremely convenient when used as a form of consideration instead of actual payments of cash, especially when used in corporate reorganisations (i.e. to reflect the flow of funds around the group without actual transfers of cash needing to be made).

The agreement also covers what steps to take when a default event or a  dispute arises, and the roles and responsibilities of all the parties involved.

Yes, this agreement becomes legally binding on all parties involved once it is signed. Breaching this agreement can have serious consequences including court sanctions.

A Promissory Note should be prepared and signed off before money is transferred, to ensure everybody is aware of the terms, structure and responsibilities of the parties involved and the relevant procedures in the event of a default or for dispute resolution.

  • Borrower details
  • Lender details (ACN, Name, Place of Business)
  • Details of interest charged
  • Repayment conditions 
  • Events of Default
  • Security
  • Choice of Governing Law
  • Dispute Resolution choices
  • Responsibility for costs
  • Applicable currency
  • Insurance requirements
  • Fees and charges

With simple interest, interest is paid on the outstanding principal (amount borrowed) only. 

To calculate the interest, simply multiply the outstanding principal by the interest rate per period by the number of periods.  Interest is not paid on accrued interest.

With compound interest, interest is paid not only on the outstanding principal but also on accrued interest. Compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest.

Each time it is compounded, the accrued interest is notionally added to the principal of the loan, which means that interest then accrues both on the principal of the loan and on the interest that accrued previously. This results in more interest than with simple interest.

A Loan Agreement is a document where:

  • A lender advances funds to a borrower.
  • The agreement is subject to the borrower’s obligation to repay that money, whether it be in a certain time or in a certain way.
  • A Loan Agreement protects both parties interests through enforcing the contract.

A Promissory Note, on the other hand;

  • Sets out the terms under which one party agrees to pay a set monetary amount to another party.
  • This agreement generally is made in writing and the payment can be required on the spot or at a future date.

The difference between the two is:

  • A promissory note is a simple document that is not as complex as a Loan Agreement and may be shorter and less detailed.
  • On top of this, a Loan Agreement enforces obligations between the signing parties, whereas a promissory note is more of a statement of the loan and a method of tracking loan repayment.

A promissory note is unlikely to be sufficient if you are:

  1. dealing with a party you are unfamiliar with; or 
  2. lending a large amount of money.

In these circumstances, you may require the protection and clarity of a comprehensive loan agreement.

If the Promissory Note contains complex clauses, it may be deemed to be a complex financial instrument and be regulated by the Corporations Act 2001 (Cth).

Yes, it is common for interest to be charged on a personal loan. Most personal loans charge interest when repaying the debt.

Interest is charged for numerous reasons; most commonly both to profit from the risk that the entity giving the loan takes, and to adjust to the changing value of money and inflation within the economy.

Yes. A promissory contains a promise to pay an agreed sum of money and is treated as a contract between two parties. 

Once the promissory note is signed by the issuing party, the payer (borrower) is under a legal obligation to make the payment to the payee (lender).

Once the issuing party (the borrower) has dated and signed the promissory note, it holds a legal and binding effect on the borrower to pay back the loan. 

Depending on whether it is a personal or corporate loan, certain consumer credit and corporate laws may apply.

Yes, the Lender can choose whether or not to charge interest. 

If the Lender decides to charge interest, they can pick how much interest to charge but it must be a reasonable rate. Depending on the amount of debt owed, the interest rate often varies from 10-15%.

The typical repayment schedule included in a Promissory Note is monthly, but this agreement is fully customizable, and you can adapt it to the schedule you want to use. 

Most loans are paid off in monthly sums, however this document provides for including any arrangements made to extend the period between payments if you get the right approval from the lender.

If you fail to pay your loan on time, there can be severe consequences.

At first, the repayments will slowly increase until you have caught up with your repayments. 

If the payee is unsuccessful in repaying the payments, they are behind in, you will hear from your creditor through a phone call or letter demanding the payment. If the demands are not met, the loan can be further escalated and/or defaulted.

Defaulting can lead to the inability to secure a loan for years. If the payee is still unable to repay the debts, court action can be enforced. 

Failure to pay your repayments may result in your account being taken through the courts system in order to legally enforce payment. The exact consequences and specific default conditions are fully customizable in this agreement.

There are several signing options available. How you sign largely depends on where the parties are located and if they will attend signing together. You can print on paper and sign, or use electronic signature tools such as Docusign or Hellosign.

If you need any assistance please contact us directly, we would be happy to assist.

If you have any questions or are uncertain about any aspect of the document please do not sign it or use it, please contact us directly and we would be happy to assist.

Absolutely! Get in touch with us and we can provide a fixed-fee price to review it.

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Not quite right? Looking for something else?

What other documents might I need?

If you’re interested in a Promissory Note you might also need to think about:

  • Company Constitution — The constitution contains a lot of the relevant information needed like the company registration details. This might be relevant if you are lending or borrowing to or from a company.
  • Shareholder’s Agreement — The information here is relevant to determine the powers of directors and shareholders if you are lending or borrowing from a company, and the decision-making structure which might affect the terms of the Promissory Note.
  • Deed of Guarantee — This document sets out the details and obligations that may apply to a guarantor if guarantees are needed for the Promissory Note.
  • Loan or Loan Facility Agreement — This document will outline the terms and conditions and obligations on the lender and borrower. This document offers more protection for you if more complex matters and larger amounts of money are involved.
  • General Security Deed — This General Security Deed creates general security interests over all of the property of the grantor, much like a fixed-and-floating charge and can be used in conjunction with the security clause in the Promissory Note.

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