The Components of a Promissory Note

The key component of a promissory note is right in its name. It's a promise that the borrower, or maker, of the note makes to pay back the money given to him by the lender. Promissory notes underlie many loans, including business loans for equipment purchases and mortgages for new offices or factories. A business can even use a promissory note to avoid misunderstandings if it makes a loan to an employee. While promissory notes can vary depending on a given state's laws or specific loan terms, they generally contain a few similar elements.

Borrower and Lender Information

A promissory note should clearly identify the borrower and lender with names and addresses. At times, the note will also include federal identifying numbers such as Social Security numbers or employer ID numbers. A representative of the business also signs the note on behalf of the business that is receiving the loan, formalizing the business's promise to pay. Having the lender sign the note is usually optional.

Loan Amount and Payments

The core of many promissory notes is the description of the loan terms. The promissory note lists the date that the loan was made, the amount of the loan and when it needs to be repaid. The note usually describes the loan's interest rate and the exact terms of payment. This can include the payment amount and the payment's periodic due date.

Security Agreement

Some promissory notes also reference a security agreement. When a promissory note is unsecured, the maker promises to pay the lender back and, if he doesn't, the lender can sue or otherwise attempt to collect the balance. A secured promissory note is one that has collateral tied to it. Promissory notes in real estate are frequently secured by mortgages or trust deeds that let lenders foreclose in case of default, for example. Business equipment financing loans may also be secured by a financing statement that allows the lender to seize the financed equipment if the borrower doesn't pay.

Other Terms

Promissory notes can have any other information that the borrower or lender needs to document the loan. Personally guaranteed notes name which of the company's officers agree to be responsible for its repayment in addition to the business's responsibility. The note could include a description of any late fees the borrower will be obligated to pay. It may also describe the collection methods that can be used. Some notes can also be written in a way that makes them transferable. This allows the lender to cash out of the note by selling it -- and the right to collect the payments on it -- to a third party.