Different Types of Promissory Notes in England

Obtaining money for your business to grow and develop can be crucial. Most businesses need a cash injection at some point and there are various ways of doing so. One such method is through a document known as a promissory note. This article will set out the different types of promissory notes and how you can utilise them for your business.

What is a Promissory Note?

Promissory notes are a form of loan agreement in which you promise to pay another party a specified sum of money. There is no restriction on who can lend you money. However, these agreements tend to involve a credit lender, bank, or investor.

Put more simply, it is akin to a legal ‘IOU’ for your business with certain legal elements. Some promissory notes can also provide an interest rate. Where you are a sole trader, these can act as a personal loan to you.

There are different forms of promissory notes to suit your circumstances. Such circumstances can include why you wish to lend money, and what you want to use it for.

1. On-Demand Promissory Notes 

An on-demand promissory note allows you to loan money without repayment until the note’s issuer issues a written demand. In this way, on-demand promissory notes usually specify a fixed time period to repay the borrowed money following a written demand rather than setting a fixed date for repayment. For example, an on-demand promissory note might specify that you must complete repayment within two weeks of receiving a demand.

This would likely suit you if you intend to enter into long-term loans. 

For example, if you ran a small football club in the lower leagues and a local businessman sought to invest in the club to keep it competitive in the league. If the amount in question was not a large one from the businessman’s point of view, he could agree to a longer repayment period from a written request for its return. This would benefit you as a small business owner, as it does not bind you to a short repayment period. Further, the businessman may not request interest on the repayment due to the nature of this relationship.

However, this type of promissory note can have disadvantages. Returning to the above example, the businessman could request repayment at any time. This would obligate your club to pay him back, even if you did not have the funds to do so. Therefore, negotiating a repayment period that is suitable for both parties is crucial.   

Some examples of on-demand promissory notes include student loans and business loans. 

2. ‘Periodic’ Promissory Note

A periodic promissory note would be more akin to a standard mobile phone contract or a simplified mortgage arrangement. Here, you agree to monthly (or weekly) periodic required payments at an affordable level below your income.  

This type of promissory note would suit you if your business needed a small financial top-up to cover the basic running costs, and you could easily repay this over time. This type of note would likely attract interest to: 

• justify the risk of your business failing to repay the amount over the specified period of time; and
• match the benefit to you of obtaining credit for your business’ running cost. 

3. ‘Lump sum’ Promissory Note

This Note would provide certainty to your business in that its terms would state a fixed date for repayment of a specified sum.  So, unlike an on-demand note, you would have advance notice of the repayment date and no surprise written demands. 

This type of promissory note would be most useful where: 

• your business is experiencing good growth;
• you have received projections of profit over the loan period; and
• these projections exceed the loan amount.  

For this reason, they are beneficial for start-up companies looking to raise initial capital to launch the business and profit as quickly as possible. You should know that lump sum notes tend to involve decent amounts of interest on the final payment. This is because of the slightly higher risk of non-payment. 

Key Takeaways

Promissory notes tend to be less formal and much shorter than some forms of lending agreements. However, courts can still enforce them against you upon non-payment. This is because, at its core, it remains a document in which you legally promise to repay the appropriate amount of money to the lending party. Because of this, and in light of the many different types of promissory notes, it is vital to obtain legal advice on the specific wording of any such Note.  

This is particularly important given that some forms of promissory notes will not suit your business. For example, an on-demand promissory note with a clause guaranteeing the lender their money back within two weeks of written request would not suit a start-up business only forecast to make a profit in two years.

If you need help with Promissory Notes, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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