Promissory Note

Glossary

Banking

Promissory Note

A promissory note is an umbrella term describing a negotiable debt instrument where the note issuer (borrower) make a legally binding promise to repay the lender(s) in strict accordance with the terms of the contract. The lenders can be banks, non-banks, institutional investors or a combination. Promissory notes are widely used in trade. A typical trade finance transaction would see buyer and seller – or importer and exporter in a cross-border context – agree terms of trade. The buyer (borrower) draws up a promissory note, which is accepted by the borrower’s bank. This evidences that the bank has granted a credit line to finance the purchase. The buyer sends the note to the seller, which presents the note for payment to the bank, which pays the seller – assuming terms have been maintained. The borrower is then contracted to meet repayment terms.

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