A promissory note is a simple agreement to evidence the terms of a loan. It is important as it clarifies that a contribution is, in fact, a loan, and ensures there are no misunderstandings about the applicable loan terms.
The following are some of the main provisions of a promissory note:
- Principal and interest
- Payments - there are a variety of ways to structure repayments. One common way is simply a demand loan, where the principal and interest have to be repaid when the lender requests. You can set out a payment schedule which may include only interim payments of interest and a final repayment of the principal, or repayments which include both interest and principal.
- Early payment - a promissory note will specify whether or not the outstanding amounts can be repaid early without a penalty. Generally, a borrower is permitted to repay the outstanding amounts at any time, but a lender wants to ensure they will earn interest for the full term, they may request that it cannot be repaid early (or without a penalty).