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.
The date set for full repayment of a promissory note (also known as a corporate note) is called the maturity date.
What Risks do They Have?
Promissory notes are not risk-free and are only as good as the companies or projects they are financing. You should research the company or project to determine whether it’s viable. An inexperienced management team, competition, or unfavourable market conditions are some of the risks associated with promissory notes.
These risks may result in the company not having enough money to repay your promissory note. If this occurs, then you may lose some, or all, of the money you invested.
Always check to see if the person selling you a promissory note is registered to sell securities or if they qualify for an exemption.
Promissory note investment schemes are common, so you should do your research and get advice from an independent investment advisor, accountant, or legal professional before purchasing this type of investment.
Read more about promissory note schemes here.
Can You Sell it Easily?
Legitimate promissory notes describe the terms, conditions, the timing of payments, and whether you can sell the promissory note. Generally, companies that sell you a promissory note will not buy back the note before the maturity date. Promissory notes do not trade on an exchange.
Speak to your financial advisor about any options that may be available for selling your promissory notes before their maturity date.
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, the promised rate of return for a promissory note is related to the risk associated with the company. The higher the risk of the company not paying, the higher the promised interest rate on the promissory note.