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During the course of business, it's inevitable that you'll come across a note payable at some stage or another. When you do you must understand what it is, how it works, and what its requirements are.
To enable you to do this, this post will look at notes payable in more detail and show you what they are, what information they should contain, and how you should account for them.
What is a Note Payable?
A note payable, or promissory note , is a written agreement where a borrower obtains a specified amount of money from a lender and promises to pay it back over a specific period. In simple terms, a note payable is a loan between you and a lender. The lender can be an individual, a financial institution, or even a company.
In terms of the agreement, the interest rate may be fixed where you'll pay the same interest rate on the amount outstanding over the life of the loan. It could also be variable where the interest on the loan changes based on certain factors, such as a benchmark interest rate.
Typically, a note payable contains the following information:
- The amount to be paid in terms of the note.
- The interest rate applicable to the loan.
- The maturity date.
- Name of the maker or payer of the loan.
- Name of the payee.
- The signature of the person who issued the note with the date signed.
Understanding Note Payables
Examples of when you may need to use a note payable when:
- You buy materials in bulk from a supplier or manufacturer.
- You buy a building or equipment for your business.
- You loan a substantial amount of money from a bank or other financial institution.
Keep in mind, though, that these are just examples of where notes payable may be used and there are many more, depending on the type of business you have.
Also, notes payable can be classified as short-term or long-term liabilities. As such, when the note payable is due within 12 months from the date of signature, it's classified as a short-term liability. Furthermore, it is classified as a current liability on the company’s financial statements because it is paid within the company’s operating period. In contrast, if it's payable at a later date, it's classified as a long-term liability. Long-term liability is generally used to determine a company’s solvency.
Irrespective of whether it's a long-term or short-term liability, at any time when a note payable is issued, your bookkeeper or accountant should classify it as notes payable. In contrast, if you are owed an amount in terms of a promissory note, your account should classify it as a note receivable.
Here is an article about note payables in more detail.
Example of a Note Payable
With that in mind, let's look at an example of a note payable. Let's say Steve borrows $60,000 from Bob on 1 February 2021. Steve signs the note payable and agrees to pay Bob $60,000 two years later, or by the latest 31 January 2023. In addition, Steve also agrees to pay all Bob a 20% interest rate per year, payable every two months.
In Steve's balance sheet the note payable will be classified under long-term liabilities because the amount is due after 12 months. Remember, if the amount was due within 12 months, it would be a short-term liability and would be classified under current liabilities in the balance sheet.
In Steve's journal, the amount he receives in terms of the note payable, $60,000, will be debited to his cash account and will be credited to the notes payable account.
In addition, the interest on the note payable will need to be recorded every time interest is paid. To do this, Steve will set up an interest payable account under his current liabilities because the interest is paid short-term.
Here, Steve will credit the interest payable account with the amount of interest due, which, in this case, amounts to $2,000. He will also debit the interest expense account with the same amount.
When the interest is paid, Steve will debit the interest payable account and credit his cash account with $2,000. Keep in mind that every time interest is paid in terms of the note payable, Steve will need to make this entry.
Key Terms in a Note Payable
For a note payable to be a valid and enforceable legal agreement, it must include the following key terms:
- The loan amount.
- The repayment dates.
- The interest rate.
- Default terms.
- The names of both the lender and the borrower.
- The mailing address where each payment is mailed to.
Besides these terms, the lender may also require certain restrictive terms as part of the agreement. These can include, for instance, terms that prevent the paying of dividends to investors while any part of the loan is still outstanding.
Often, if these terms are breached, the lender then has a right to call up the loan, although it is possible for the lender to waive these breaches and continue to accept monthly or periodic payments from the borrower. Also, a note payable may require collateral as security for the loan.
It's also important to keep in mind that, for a note payable to be valid and enforceable, the borrower should print, sign, and date the note payable.
Image via Pexels by Andrea
Notes Payable vs. Accounts Payable
Although accounts payable and notes payable are both liabilities and represent amounts payable to businesses or financial institutions, there are some significant differences between the two.
Accounts payable are always short-term liabilities because they are due and payable within one year. These accounts payable involve credit received from businesses and vendors which require no written agreements and usually, no interest is charged on them. Accounts payable are typically day-to-day business expenses that businesses incur including supplies, utilities, goods, or professional services.
As said above, notes payable are written agreements that involve interest and can be classified as long-term or short-term liabilities.
Get Help With A Note Payable
Because notes payable often involve substantial amounts of money with interest, they must contain accurate and relevant information.
Fortunately, many financial services lawyers can help you when it comes to notes payable and give you the advice you need. If you need any more information on notes payable or advice regarding them, feel free to visit our website where you’ll find many other resources.
Meet some of our Note Payable Lawyers
Atilla B.
Atilla Z. Baksay is a Colorado-based attorney practicing corporate and securities attorney. Atilla represents clients in the negotiation and drafting of transactional (e.g. master service, purchase and sale, license, IP, and SaaS agreements) and corporate (e.g. restricted stock transfers, stock options plans, convertible notes/SAFE/SAFT agreements, bylaws/operating agreements, loan agreements, personal guarantees, and security agreements) contracts, in-house documents (e.g. employment policies, separation agreements, employment/independent contractor/consultant agreements, NDAs, brokerage relationship policies, and office policy memoranda), and digital policies (e.g. terms of service, privacy policies, CCPA notices, and GDPR notices). Atilla also reviews, and issues legal opinions concerning, the security status of digital currencies and assets. Following law school, Atilla practiced international trade law at the Executive Office of the President, Office of the United States Trade Representative, where his practice spanned economic sanctions enacted against goods originating in the People’s Republic of China valued at $500 billion. Afterwards, Atilla joined a Colorado law firm practicing civil litigation, where the majority of his practice comprised of construction defect suits. Today, Atilla's practice spans all corporate matters for clients in Colorado and the District of Columbia.
Donya G.
I am a licensed and active NY and CT Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating commercial agreements. My practice focuses on working with small business clients as well as clients from international brokerage firms on acquisitions, especially in the Ecommerce space; drafting, negotiating, reviewing and advising on business agreements; ; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.
Anand A.
Anand is an entrepreneur and attorney with a wide-ranging background. In his legal capacity, Anand has represented parties in (i) commercial finance, (ii) corporate, and (iii) real estate matters throughout the country, including New Jersey, Pennsylvania, Delaware, Arizona, and Georgia. He is well-versed in business formation and management, reviewing and negotiating contracts, advising clients on financing strategy, and various other arenas in which individuals and businesses commonly find themselves. As an entrepreneur, Anand is involved in the hospitality industry and commercial real estate. His approach to the legal practice is to treat clients fairly and provide the highest quality representation possible. Anand received his law degree from Rutgers University School of Law in 2013 and his Bachelor of Business Administration from Pace University, Lubin School of Business in 2007.
Michael M.
www.linkedin/in/michaelbmiller I am an experienced contracts professional having practiced nearly 3 decades in the areas of corporate, mergers and acquisitions, technology, start-up, intellectual property, real estate, employment law as well as informal dispute resolution. I enjoy providing a cost effective, high quality, timely solution with patience and empathy regarding client needs. I graduated from NYU Law School and attended Rutgers College and the London School of Economics as an undergraduate. I have worked at top Wall Street firms, top regional firms and have long term experience in my own practice. I would welcome the opportunity to be of service to you as a trusted fiduciary. In 2022 I was the top ranked attorney on the Contract Counsel site based upon number of clients, quality of work and top reviews.
September 7, 2022
Doug F.
Doug has over 20 years of private and public company general counsel experience focusing his legal practice on commercial transactions including both software and biotech. He is a tech savvy, business savvy lawyer who is responsive and will attain relationship building outcomes with your counterparty while effectively managing key risks and accelerating revenue. He received his Juris Doctor from Boston University School of Law earning the Book Award in Professional Ethics and after graduation he taught legal writing there for a number of years. Prior to law school, Doug earned a M.A in Mathematics at the State University of New York at Stony Brook, and a B.S in Honors Mathematics at Purdue University. After law school, Doug joined Fish & Richardson, where his practice focused on licensing software, trademarks and biotech. While at Fish & Richardson Doug authored a book on software licensing published by the American Intellectual Property Lawyers Association. Later he joined as General Counsel at FTP Software and led an IPO as well as corporate development. Doug has broad experience with a broad range of commercial agreement drafting and negotiation including SaaS software and professional services, distribution and other channel agreements, joint venture and M&A. Doug continued his leadership, corporate governance and commercial transaction practice at Mercury Computers (NASDAQ:MRCY) leading corporate development. Doug’s experience ranges from enterprise software to biotech and other vertical markets. He joined the board of Deque Systems in 2009 and joined in an operating role as President in 2020 successfully scaling the software business.
September 13, 2022
Kathryn K.
I graduated from Georgetown Law in 2009 and have been practicing for fourteen years. I primarily work on commercial contracts. I specialize in drafting, reviewing, and negotiating MSAs for services companies, specializing in SaaS agreements. I have drafted online terms of service, acceptance use policies, and privacy policies for clients across a range of industries. In addition, I counsel clients on NDAs, non-solicitation/non-competition agreements, employment contracts, and commercial and residential leases. Prior to opening my own practice, I worked for four years at one of the most prestigious law firms in the world, an appellate litigation firm, the federal government, and one of the country's most renowned government contracts firms. I live in Boulder but represent clients nationwide. Although I have represented numerous Fortune 500 companies and the Defense Department, my passion is advising startups and small businesses. Like so many of my clients, I am an entrepreneur and have owned and operated three businesses (my law firm and two companies outside the legal field). I understand the needs and concerns of small business owners. I look forward to working with you.
September 12, 2022
Wendy C.
Business Advisor and Real Estate Consultant: Small boutique firm working to assist entrepreneurs, business start-ups, property investors, new home buyers, and distressed owners Wendy Calvert began her career as a corporate attorney focusing on complex commercial litigation, primarily in construction, property and casualty, and contractor liability. Through this experience, Wendy has managed and successfully litigated cases in Illinois and Wisconsin. In 2004, Wendy relocated to Illinois to work as an insurance litigation counsel and later as an executive sales consultant and insurance expert. Wendy now utilizes her skills as a contract negotiator, litigator, and sales consultant to negotiate real estate deals and help entrepreneurs create and grow the businesses of their dreams. EDUCATION Wendy earned her Juris Doctor in 1999 from the University of Wisconsin Madison. In 1989, Wendy graduated with a Bachelor of Arts in Business Administration and Communications from Marquette University.
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Note Payable
Virginia
I loaned money to a 5013c organization, I want a lawyer to look over the contract, worried about them defaulting on it
I am worried about a 5013c organization defaulting on a promissary note, they do not seem to have their act together, want to have a lawyer look over the promissary note and get advice on what happens if they default on it
Donya G.
Sure. I take it they have not yet signed as yet? You can draft the agreement with some protections to ensure payment; however, you need to keep in mind that payment will always be contingent on whether they have money to pay or not. I am a contracts attorney and if you you would like my services, you can contact me on the contracts counsel website, or post your job on the website and attorneys will respond to your job. All the best Donya Gordon
Contracts
Note Payable
New York
I need to sue on an unpaid promissory note
The note was written back in March 2019 I hired an attorney and he has done nothing for me! I made tons of requests to try to settle out of court with this man and he just keeps blowing me off
Matthew S.
You need someone who will attempt to settle the matter for you and if that fails be prepared to sue on the note and take the necessary action to collect. This assumes the debtor has assets to collect against. It can take a while. I have had some folks pay relatively promptly, others several years. Communication between attorney and client is very important in this process. If you have no idea what is going on in your case you can get very anxious. I make sure you get consulted on each development and you get copies of each filing.
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