Glossary
Promissory Note
A promissory note is a signed written promise by one party to pay a specific sum of money to another, either on demand or on stated dates, often with interest.
A promissory note is a written instrument in which the maker promises to pay a set amount to the payee. A typical note states the principal, the interest rate, the payment schedule, the maturity date, and what happens if the maker defaults. Notes can stand alone or be paired with a security agreement that gives the lender collateral, and they are often backed by a personal guarantee from the business owner.
In commercial collections, creditors frequently use promissory notes to convert a past-due open account into a structured payment plan. Instead of chasing a pile of aged invoices, the creditor and debtor agree on the total balance owed and sign a note that spells out monthly payments. A well-drafted note usually includes an acceleration clause, a late charge, a provision for attorney fees, and language confirming the debtor has no defenses to the balance. Interest rates must stay within any applicable state usury limits, which vary.
For instance, a fictional electrical supplier, Northgate Wire, is owed $48,000 by a contractor that has fallen 120 days behind. Rather than sue right away, Northgate agrees to accept $4,000 per month for twelve months, documented in a promissory note signed by the company and personally guaranteed by its owner. If the contractor misses a payment, Northgate can accelerate the remaining balance and sue on the note.
A promissory note matters to a creditor because it turns a disputed or loosely documented account into a clear, signed obligation. Suits on notes are often simpler to prove than suits on open accounts, since the debtor has admitted the amount in writing. Signing a note can also restart or extend the time to sue in many states, though creditors should not rely on that without checking local law.
Example
Northgate Wire converts a $48,000 past-due account into a signed 12-month note at $4,000 per month, with an acceleration clause and the owner's personal guarantee.