What is a promissory note used for in a company?
Many times we have heard that a promissory note is a credit instrument and not a form of guarantee…
However, in commercial practice, they are used on a daily basis, precisely as an instrument to guarantee payment of credit sales.
This is mainly because the law applicable to the collection of a promissory note establishes a special judicial procedure that allows the holder of a promissory note to seize its debtor’s assets (including bank accounts).
At the first notice, i.e., in a period of time considerably shorter than in other cases, your Debtor will be seized of his property for non-payment.
It is important to mention that in commercial practice, it is customary that the Promissory Note is not only signed by the company or legal entity that buys your products, and that in many cases of breach of obligations, is the first to dispose of its goods, but it is also signed as a guarantee by the legal representative or person (natural person) with whom the commercial deal is carried out, who will be jointly and severally obliged to comply with the payment with its own assets (including bank accounts).
In this order of ideas, the commercial practice of using the Promissory Note as a way to guarantee the payment of credit sales is due to the following reasons:
1. Special procedure due to its execution time.
2. Allows the seizure of assets (including bank accounts) from the beginning of the procedure.
3. It is common for it to be signed by a natural person who will also be liable with his own assets in the event of default.
Different companies choose to use this method for short-term financing.
In this way, they issue a package of commercial paper with a face value higher than the purchase price, so that the investors’ return lies in the difference between the two values.
Among its advantages
It can be highlighted the flexibility it provides to customers to be able to acquire a certain good or service even if they do not have sufficient liquidity and pay for it in the future.
In addition, it is legally backed, so that the owner of the promissory note has the right to collect the face value.
And thus have a higher return than fixed-income financial instruments.