Promissory Note Defined

• A promissory note is a type of negotiable instrument that gives the bearer of the note the right to collect funds from a borrower. The note can either compel a person to pay on demand or at some specific future date. The note should be written down and detail the important elements of the loan. This includes how much was borrowed, when it needs to be paid back, what the interest rate is, and whether there is any collateral securing the loan.
  
  

Applicable Law

• Promissory notes, as a type of negotiable instrument, operate in most states under Article 3 of the Uniform Commercial Code (UCC). The UCC is a uniform code created by the National Conference of Commissioners on Uniform State Laws, whose goal is to create a consistent set of laws for certain areas of laws. Article 3 of the UCC has been adopted by every state except New York, so the standards found in this article generally apply when drafting a promissory note.
  
  

Indorsement Defined

• An indorsement is used when negotiating, or transferring, the rights to claim the funds outlined on the note to another party. The indorsement is the signature of a party signifying a change in the note's term after it has been created. An indorsement can be made by an original party to the note or by a third party. An indorsement can transfer the rights to the money guaranteed by the note, restrict payment that the note provides, or transfer the payment obligation of the note. The signature is usually accompanied by words that state the purpose of the indorsement.
  
  

Indorsement For Businesses

• Any person who acts, or says he acts, on behalf of a business and indorses a promissory note binds the business as long as the signer at least has apparent authority under contract law. Apparent authority exists when the other party believes in good faith that the signer is a representative of a business. This belief must be based on an act by the principal, indicating that the agent has the authority to act. If the person who signs the note is, in fact, a representative of the business, the signature will demonstrate clearly that the person is signing on behalf of the business and that the signer is not personally responsible for the signature and all rights and responsibilities that entails. If the signature does not show unambiguously that the person was signing as a representative, the signer is personally responsible for the note if the other party took the instrument without knowing that the signer was only a representative.
  
  

Tips and Disclaimer

• When creating or indorsing a promissory note, either as a borrower or a lender, consult with a licensed attorney in your area. An attorney will ensure that the note complies with all state laws and that the terms and responsibilities created by the note are understood by all parties. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.