Promissory notes
What is a promissory note?
A promissory note, also known as a corporate note, is an unconditional promise made by a borrower to pay interest and repay borrowed money by a specific date or set of dates. It is similar to a loan or IOU. Companies use these notes to finance new products or repay debt. In return for the loan, companies pay investors a fixed rate of return over a set period of time. The date set for full repayment is known as the maturity date
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What risks do they have?
Legitimate promissory notes are not risk-free and are only as good as the companies or projects they are financing. You must research the company or project to determine whether it’s viable. Bad management, competition, and unfavourable market conditions are some of the risks associated with promissory notes. Investment advisors or financial planners sell these notes. Promissory notes that mature within a year of when they are issued may carry additional risk.
People not registered to sell securities also promote and sell promissory notes to a broader, less sophisticated audience. These often turn out to be scams, offering high returns with little or no risk to attract a wide number of people.
Scammers often use a portion of the investor’s money to pay commissions to the promoters or salespeople, keeping the rest to themselves.
Some promissory note issuers may genuinely believe they can secure a high rate of return for the lenders/investors. These business ventures typically fail and the issuers of the notes are unable to repay the original lenders/investors.
Can you sell it easily?
For legitimate promissory notes, the terms and conditions describe the timing of payments and when you can sell the note.
For illegitimate promissory notes, the terms are meaningless because the offer is fraudulent and you will lose all of the money you invested when the scheme collapses.
What are the costs?
Sales people earn commissions for selling promissory notes.
What are the expected types of returns?
Assuming the company is able to pay, you can expect to receive a fixed rate of return that pays more than the average interest rates offered by banks for a set period of time.
For illegitimate promissory notes, the scammers often meet the terms and conditions at first, returning significant rates of returns to investors. But this is never sustainable, and sooner or later the money dries up, as in a Ponzi scheme.