Promissory notes are a financial document that is issued and delivered to another company or person with a very clear objective, which is none other than contracting a monetary obligation. That is, he commits to pay you an amount of money on a certain date.
It is very common in the face of certain liquidity problems on the part of their issuers and that they prefer to pay with this format than with other types of products, including the traditional payment on account. This is a practice used by some small and medium-sized companies to solve their accounting problems.
This is a system that is used not only to pay customers or service companies, but also their own workers. Even though in a punctual way and never as a more or less regular habit when sending monetary amounts to third parties. On the other hand, and to better understand its understanding, it is a product that is very similar to what a bill of exchange is.
Requirements to correctly issue a promissory note
In addition to all these conditions, the promissory note must contain some minimum requirements for the document to be valid and which are the following:
- It must be expressed in the document in a very clear way the word "pay", not valid other meanings or words.
- Expiration date must be included in all cases. That is to say, the period in which it will be paid the money to another company or person.
- will be designated a place a payment. It does not have to be a specific bank or at a specific address. On the contrary, it will suffice to indicate the population where this bank movement is going to be carried out (Madrid, Barcelona, Segovia...)
- It will be a firm promise with which the issuer commits to make the payment and that will be expressed, either in number or in letters.
- Of course it is mandatory that in this document the place and date of issuance is reflected of this product. Like the issuer's signature, since if any of this data were missing, it would be declared null and therefore could not be charged under any circumstances.
I will pay to order and not to order
In any case, there is a difference in this financial product that can lead to certain mistakes in its issuance. It is the difference that exists between the promissory note to the order and not to the order, where the first one consists of the fact that the payer agrees to pay the selected payment within a determined period of time.
While, on the contrary, the so-called no to the order is based on the fact that it does not allow it to be endorsed to a third person and, as a consequence, a greater bargaining power can be generated. Although through the by notarial and with the full consent of the issuer. This is an aspect that must be taken into account so as not to get the occasional negative surprise in its formalization.
Although there is an advantage in this last payment model that some small and medium-sized businesses do not know: they do not pay taxes for the Tax on Documented Legal Acts.
With what they can obtain a greater economic benefit with their issuance by saving this fiscal expense. While, on the contrary, its main disadvantage is the fact that it is not possible to resort to executive proceedings to claim the corresponding payment, in case of return or non-payment of the same.
Therefore, you will have to determine which of the two alternatives is more effective for each moment because they provide different characteristics. And that, in principle, they are neither better nor worse, but are based on the real needs of the company's accounting.
types of promissory notes
This means of payment supports many models and a diverse nature. A first difference materializes with respect to who is the issuer. It can be a bank note which are those issued by a credit institution and are considered to be the most recognized of all. While on the other hand, there are the company promissory notes that, as their name indicates, are the responsibility of the same.
Another difference takes place depending on the moment in which the payment is made and which are the ones that arouse the most interest due to the importance of this characteristic. These are the classes that are currently available:
- Demand Notes: are those that have to be executed at the precise moment in which they are presented and therefore cannot cause delays in this accounting movement.
- daily promissory notes: It occurs when it is decided to set a fixed date for the time of collection and that constitutes its expiration. It has the drawback that it prescribes if the claim is made with only one day's delay.
- non-maturity promissory notes: although it is not the most common format, it must be emphasized that it is practically the same as the document in view. That is, it is charged at the precise moment of being requested by the user.
Types of promissory notes according to the form of payment
It is another of the most common divisions in this financial product. It gives rise to new formats that we will detail below:
- crossed promissory notes: they are especially characterized by a very special feature: they must be paid, either into an account or at a bank office.
- Promissory notes to pay account: as is their name, they refer to documents that can only be charged on account. While in the last distinction it is based on the endorsement action, with the following models that we expose:
- promissory notes to order: where the recipient can transmit it to a third party through this financial strategy.
- promissory notes not to order: it will not be possible to execute the previous action in your subscription and that stands out for being one of the most expansive formats with respect to the commissions that are applied to it.
- And finally, another old acquaintance among small and medium investors, such as the registered promissory note. The main characteristic of which is that it is presented without an order clause. While on the other hand, it can be endorsed to a third person or company.
registered promissory note
As it is easy to understand, there are many kinds of promissory notes, although perhaps due to its special characteristics, one of the most relevant is the registered promissory note. What is this document about? Well, as its name implies, it is a product for which a person or company is responsible for pay elsewhere in the process a certain amount of money adjusting to certain terms in the period of time.
One of its most important uses is that it is a document that is usually used for bank purposes. What does this mean? Well, simply that its use used to pay suppliers and it is for this reason that it is a very frequent operation on the part of small and medium-sized companies to carry out this type of payment on account.
In addition, it is easier to fill in than in other more complex promissory notes. Among other reasons, because for this payment system to be valid it must be registered and never payable. That is, its issuance will be made to another person who is the collector.
Forms of a registered promissory note
Despite their apparent simplicity, they are presented in different broadcast formats, as we will explain below:
- Nominative, without clause of to the order. It is the most common of all and is based on the fact that a person must be designated as the object of the right. Where it will be necessary to put the name of the recipient in the document.
- nominative not to order. It is a slightly more complex document, but it can be understood very easily as it is a system that requires the ordering party to prohibit it from being transferable by endorsement. In any case, to fill out this document you will have to specify the amount of money, name of the recipient and the date on which it is made. With the caveat that this promissory note is "not to order."
In both cases, they are payment systems widely used by small owners to pay suppliers for the simplicity of their models. Just like it allows them to adjust to the payment date.
Advantages when executing a registered promissory note
The use of the registered promissory note entails a series of advantages for its executors and therefore they must be assessed at all times, whether these operations are carried out by individuals or by small companies. Such as the following actions that we are going to present below:
It is a payment tool that serves as a substitute for cash and that allows its payers a greater flexibility in its management and issuance.
Its application allows, in fact, that there is no need to handle large amounts of cash. With the comfort that it brings to small and medium-sized businessmen who, in many cases, do not have enough cash to carry out these monetary operations.
One of its great contributions is that it makes it possible to have large amounts of money in banks. To the point that they can use it at any time to boost payments from these promissory notes.
While seen from the other party, the recipient, it supposes a great advantage as it is a contract that is legally binding in the movement of monetary flow. But what is even more important for their interests: it guarantees them that the payment can be made without any kind of restrictions.
On the date stipulated in the document. Generating greater security over the money owed. Due to its issuance with the name of the natural or legal person who must collect it and that differs from the bearer promissory note because this data does not appear at any time.
bank promissory note
This is one of the most common types of promissory notes. The bank promissory note is a document in which companies responsible to pay a monetary amount to other people. Being a common form as a means of payment in commercial transactions that take place between small and medium-sized companies.
Its particularity lies in the fact that this document is usually contract in very short terms: 30, 45 or 60 days. Never for longer periods of stay. Where when the time of maturity arrives, it is the bank itself that presents it as a collection in the checking account to which this financial product is directed.
Advantages of the bank promissory note
Such is the use that the bank promissory note is currently given that it is necessary to highlight the benefits of this accounting operation. There are several and of a diverse nature, such as the ones that we present below, and in any case they affect both parts of the process:
One of the most relevant is that the beneficiary of the document is going to receive the amount which is reflected in the document without any problem.
While on the contrary, delay the payment, the performer can dispose of that capital to allocate it to other business tasks. For example, investing in other projects that are profitable for the entity.
From this scenario, we must review a scenario that can happen with some frequency. It is none other than past expiration date without having received it from the recipient. In this specific case, you will have no other solution than to go to the judicial bodies to receive the money owed. Normally the account will be charged, although it may take some time for this scenario to occur.
On the other hand, the bank promissory note is distinguished from other documents with similar characteristics because it is known in advance what is the payment date. This is in this way, because it is always reflected in a maturity. This financial product is also known as a "payment promise" because of the connotations of intentions it has. As well as for the security it provides to the recipient thereof.
Although it is a way to pay clients or suppliers, it is not very strange that it is used to pay for the collaborations of professionals or even in some other situation the payroll of workers. Although in the latter case, always in a timely and exceptional way in its use.
negotiate promissory note
In this process, several parties that are part of this process must be taken into account. On one side, to recipients of this financial product and, secondly, to the banks themselves, if the case arises. So that in this way, their contracting conditions can be changed. In any case, negotiating the promissory note does not have to be a complex operation for either party if there is a clear coincidence in the objectives pursued.
From this general scenario, one of the most common scenarios where a negotiation is required is when you want to collect the amount before it expires. Well, in this particular case, it is necessary to know that all the Doubts that the financial institution can bring to anticipate payment. To the point that (the bank) will have no choice but to justify its decision, one way or another.
Delimit the responsibilities and forms of payment
In this sense, one of the first measures that the banks will take will be to open a very detailed study on the documentation provided by the performer. Where the needs of both parties are taken into account. On the other hand, one of the most relevant aspects in the negotiation of the promissory note resides in the fact that all aspects related to this financial product must be made very clear. That is to say, if the promissory note is endorsable, banking or otherwise commercial. There are so many variables that can occur that it can generate a very complex negotiation.
While on the other hand, an aspect as important as whether the company is the holder of a promissory note not to order cannot be forgotten. Because it can be a Difficulty reaching a satisfactory agreement. As in the recourse discount format, when contemplating the possibility that if it gave rise to a scenario of non-payment by the company, it would be the company itself that would have to face the payment.
No less important are the expenses in the management and maintenance of all these scenarios and that can also be incorporated into the negotiation. To avoid a disbursement that may be excessive for the interests of the companies. Finally, other factors to take into account from now on is knowing the financial institutions that provide discounts with or without resources. Not surprisingly, it will depend on who is ultimately the one who has to answer for the payment.
Collect promissory note before maturity
When we are referring to a promissory note, we are talking about a document by which a company or person agrees to pay an amount to another company or professional in a previously established period of time. This period is what is called its maturity and the problem in some cases lies in the fact that these monetary contributions are needed before it expires.
At this time there are several strategies in your management to collect the promissory note before its maturity. Generally through making this financial product according to your payment method. This strategy leads to the fact that there are several formats in its newsroom that meet these well-defined characteristics. The most common, as its name indicates, is through the non-maturity promissory notes and that allow the recipients at the precise moment in which this monetary transaction is requested. Without having to wait for any particular date.
Promissory Note Before Maturity: More Flexibility
It is a simpler model for companies that have to collect money as a result of their work, services or any other motivation. By having greater flexibility to receive cash. This is an alternative that both companies and self-employed workers have to expedite this part of the process.
On the other hand, it is quite frequent among small and medium-sized companies that need to have sufficient liquidity before the date set in this contract. Or, on the contrary, that can be received before expiration. Well, in these cases, a solution is materialized by what is called promissory note discount. But what does this other financial product consist of? Well, in something as simple as allowing the second party in the process to collect the amount of the promissory note before the execution date arrives.
Entrepreneurs and freelancers who can't wait
This is a scenario that occurs with some frequency. among the self-employed. To the point that they need a liquidity tip to carry out their professional or commercial activities. In the sense that they cannot wait for a long time until this account charge is made effective. Therefore, it is highly recommended that they express their wish to the other party that they not be subject to a promissory note per day or on sight. Since in this case, they will not be able to charge it ahead of time.
endorse a promissory note
This action is recognized when there is a clause written in the document by which the endorser transmits or assigns to a third person the rights derived from this operation. Generally and for better understanding, with the following heading: "Pay to Miguel Ángel García Judge....". where should you go initialed with his signature for it to be valid. While on the other hand, it should not be forgotten that endorsing the promissory note is usually done in all documents with the sole exception of promissory notes not to order.
cross promissory note
As we all know, there are many kinds of promissory notes and one of the most relevant is the so-called crossed. But what does this means of payment that is frequently used by small and medium-sized companies really consist of? Well, it is basically that it can only be charged by providing the document and that it presents some lines on the front (where the name of the bank in which this monetary movement is going to be executed can be expressed). With the real option of receiving the amount from the bank office as long as the beneficiary is a client of the financial entity where the liberalization of this promissory note model will take place.
Despite what some users may initially think, the crossed promissory note is not homogeneous. Rather, it is divided into two different formats. They are the general and special cross promissory notes. In the first case, it refers to the fact that the name of any financial institution will not be exposed. As a consequence of this characteristic, its main effect is that it will be able to payable at any bank, even if the recipient is not a customer of the same.
One of its most important advantages resides in the fact that it is a payment system easier to formalize and that it does not require any connection with the bank that issues it. For this reason it is widely used when the two parties reach an agreement to develop this strategy for the payment of a service or professional work. From this point of view, it is a much more flexible product to make payments on account.
The other format, called special promissory note, on the two lines on the obverse will include the name of the bank that will be in charge of making the payment on account. In other words, there will be no choice but to have a checking or savings account subscribed with the financial entity. It's about a stiffer model that can generate certain problems to finally reach its resolution.
Participants in the crossed promissory note
As with other kinds of promissory notes, Two parties are involved in this process., as on the other hand it is easy to understand. On the one hand, the figure of the spinner who is none other than the one who assumes the role of principal obligee. While on the other hand, the beneficiary is also present and that refers to the person or company that may demand the content of this document. Beyond other considerations of a technical nature.
As can be seen, there is a wide range of alternatives if you want to make a payment to a client, supplier or worker. Where the ideal scenario is that a model agreed upon by both parties is chosen. To avoid very unwanted situations that can cause more than one problem in the account charge. And that leads to amounts being collected later than necessary and planned by the parties involved.
Benefits of notes to order
One of the main advantages of promissory notes to order is that it provides greater flexibility and comfort to the parties involved and during the transmission process. While, on the contrary, the other format (non-order promissory notes) are fundamentally distinguished because Assignment to third parties by endorsement is not allowed. And in this way it can significantly harm the interests of the recipient of this financial product. Beyond another series of technical considerations that will be the subject of another class of technical analysis.
Another aspect that needs to be assessed is the one that refers to your payment. In the sense that the promissory notes not to order require timely notification to confirm that the payment date expressed in this accounting document is respected. Like the fact that it is a process that can usually take longer as a result of the characteristics it presents.
In any case, it is very convenient for the two agents in this process to analyze its advantages and disadvantages in order to find a solution to this problem that companies often face when making a payment. Because in principle, one is not better or worse than the other, but depends on actual needs of the payers and recipients of these promissory notes. Although the first one may be more favourable, above all because it is easier to issue and manage until it is finished.
How to fill out a promissory note?
Perhaps one of the most relevant aspects that users demand is how this product is channeled or filled. It is not an excessively complex process, but it needs to be developed correctly because any error in it can cause excessive problems for the two parties that make up this process. Even with the real risk that the recipient of the promissory note will not be able to collect it. Therefore, it is necessary to pay a little attention to this practical part about this financial product.
First of all, it is important to emphasize that it may be different depending on the type of promissory note that we have in process to make. But in general terms we are going to explain them to you through the following steps that will necessarily have to be formalized. With the data that must be expressed in this document:
Name of the entity and office issued. It will usually come at the top left of the document. In all cases, it must be expressed in a very clear way and without any incidence or blur so that it cannot be identified or simply is really ineligible.
Your expiration. Without a doubt, it is one of the most important parts of the promissory note because the date of payment of the amount entered in this document will depend on it. It will be expressed below the previous data. And it must be very clear and without reasons for confusion.
Identification of the person to whom the payment of the promissory note is addressed. As is logical, understanding is totally essential for its correct writing. It will be either the name of a company or a legal person and must be accompanied by the total amount that is sent to another recipient. All these data are expressed in the central part of the document. With a small detail, and that is the amount, it must be written in letters, never in numbers.
Serial number and document of the promissory note. As is logical to understand, it must have a sequence depending on the activity in this means of payment. Through some digits that will be different and that will be displayed in the lower left part of this document.
Serial and document number coding. These are the figures that come by default and are located at the bottom of the document. It is essential for it to be valid and for the amount to be paid under the conditions established in each of the formats of the promissory notes.
The date and place of issuance of the promissory note. The day, month and year in which this product is issued is expressed. Like the town from which it formalizes and in both cases they must be written very clearly in letters.
The promise to pay and the amount entered in figures. It comes in the central part of the document with the following message: "for this promissory note, I promise to pay, at the indicated expiration date".
Customer account and IBAN code of the drawn account. With all the bank details on the account in which this accounting movement is going to be executed. It must be complete, without missing any detail, just as it is included in invoices to companies or suppliers. Being present in the upper right corner of the document.
If all these data are incorporated correctly, there will not be the slightest problem to carry out this operation with total success in terms of its results.