Promissory note definition

A promissory note is financial instrument that is entered into by a borrower and a lender. The borrower agrees to repay the face amount with any applicable interest at a future time. For example, when a business borrows money from a bank, a promissory note is executed by both parties.

Promissory notes are a widely used form of debt instrument. The U.S. government, for example, finances part of the national debt through the sale of Treasury Notes or T-bills.

Significant sales and purchase transactions may be collateralized by the use of promissory notes. Real estate transactions, for example, may be funded with promissory notes. Large corporations issue notes (commercial paper) to raise capital.

The credit risk associated with any promissory note will depend on the terms, collateral and the financial strength of the borrower or note issuer. In the U.S., a promissory note that meets certain conditions is a negotiable instrument governed by Article 3 of the Uniform Commercial Code (UCC).