A business note is a type of credit that is used as a form of payment. It has an interest rate and a maturity date, mostly short-term, from which it can be exchanged for money .
The business note is a security that once the expiration date of the same has passed, it can be exchanged for money. This document contains a payment commitment from the issuer to the receiver on a certain date.
Different companies decide to use this method to finance themselves in the short term. In this way, they issue a package of company promissory notes with a nominal value higher than the purchase price, so that the investors’ profitability resides in the difference between the two securities.
Among its advantages, we can highlight the flexibility it grants to customers to be able to acquire a certain good or service even if they do not have enough liquidity and pay for it in the future. Along with this, it is legally backed, so that the owner of the promissory note has the right to collect the nominal value. It has a higher profitability than fixed income financial instruments.
Its main disadvantage is the risk associated with this type of promissory note. It is not backed by either the investment guarantee fund or the deposit guarantee fund. In this way, in case of insolvency of the company, there will be difficulties for collection. In addition, they have low liquidity, which sometimes prevents immediate collection.
Characteristics of the business note
Among the different peculiarities that this type of promissory note presents, we highlight the following.
- It is used both as financing and for the payment of commercial operations.
- It consists of an expiration date, they are mainly issued in the short term.
- It can be issued as a note to order, which can be transferred by the owner without any requirement or procedure. It can also be issued as a promissory note not made to order, this is characterized by the fact that if you want to transfer, it must be signed before a notary public.
- They have a higher risk than other financing instruments, so the profitability is higher.
- Your exchange for money will be subject to the financial situation of the issuing or guarantor company.
In conclusion, the bank promissory note is a type of promissory note that can be used both to obtain financing in the short term and for commercial operations. Their profitability is higher than fixed income instruments as they have a higher risk of insolvency. They are issued, mainly, in the short term.