Promissory Note Template | UCC 3-104 Compliant (US)

A promissory note is a negotiable instrument under UCC §3-104, which means a written, signed, unconditional promise by a maker to pay a fixed amount of money, payable to order or to bearer, on demand or at a definite time, with no other undertaking attached. Those elements are not decoration. A note that buries a services obligation or a condition precedent inside the promise falls out of Article 3, so the holder loses the ability to transfer it free of the maker's personal defenses under UCC §3-302. Lenders who plan to sell or pledge the paper later care about this.

The document is often confused with three neighbors. A loan agreement is bilateral and full of covenants and funding conditions; the note is the one-way payment promise sitting underneath it. An IOU merely acknowledges that money is owed, with no payment date and no remedy, so courts treat it as evidence rather than as an instrument. A convertible note promises repayment but turns into equity at a priced round. If you are raising startup capital rather than lending, the convertible note agreement drafted to Regulation D Rule 506 is the right starting point.

Promissory notes sit at the intersection of state commercial law, state usury law, and a thin layer of federal consumer rules. Every state has enacted a version of UCC Article 3, so the negotiability test, the presentment and dishonor rules at §3-501 and §3-503, and the lost-instrument procedure at §3-309 travel with the note across state lines. The limitations period matters more than most makers realize: UCC §3-118 gives the holder six years from the due date on a note payable at a definite time, and six years from the date demand is made on a demand note. The Cornell Legal Information Institute text of UCC section 3-104 on negotiable instruments sets out the statutory language in full.

Interest is where notes get voided. Each state fixes its own ceiling, and the penalty for crossing it runs from forfeiture of the interest to forfeiture of the principal. Layered on top, Regulation Z adds disclosure duties on loans made for personal, family, or household purposes, the Servicemembers Civil Relief Act, 50 U.S.C. §3937 holds the rate to six percent on obligations incurred before active duty, and IRC §7872 imputes interest to any note written below the applicable federal rate. A zero-interest family note is not a neutral act, since the foregone interest is treated as moving back and forth between the parties. Signature by the maker is the only universal formality: witnesses are never required, and notarization matters only when a recorded mortgage or deed of trust is involved, as the business contracts and incorporation documents catalogue shows for related instruments.

The most common commercial trigger is seller financing. A buyer takes the assets of a small business, pays part in cash, and signs a note for the balance, usually secured by those assets under a UCC-1 filing. The second is the shareholder or member loan, where an owner advances money to a company that cannot yet borrow from a bank and wants the advance recorded as debt rather than as a capital contribution, because the tax and priority consequences differ sharply. Family lending is the third, and it is where the paperwork is skipped most often and regretted most.

Converting an unpaid invoice into a written payment plan is the quiet fourth use: it turns the receivable into scheduled installments and gives you an instrument you can sue on directly. Two edge cases justify care. When the note is secured by real property, the note itself stays simple while the lien lives in a separate recorded document, a structure familiar from seller financed land contracts and other US real estate paperwork. And when the maker is married in a community property state, both spouses may need to sign for the debt to reach community assets.

• The identification of the parties names maker and payee in full legal form and adds jointly and severally language when two or more makers sign. A note signed by a member for an LLC without the entity designation can expose that member personally under UCC §3-402.
• The principal and interest provision states the amount advanced, the rate, the day-count convention, and whether interest is simple or compounding, and it carries a usury savings clause reducing the rate to the maximum permitted by governing law and applying the excess to principal. Any original issue discount is disclosed here, because a discount retained by the lender counts as interest for usury purposes.
• The repayment structure offers three configurations, payable on demand, a balloon at maturity, or level amortizing installments, each directing payments to accrued interest before principal.
• The default and acceleration provision lists the events of default, the notice and cure period, and the holder's right to declare the whole balance due at once, with a default rate and a late charge sized as liquidated damages rather than a penalty.
• The collection terms cover attorney fees, waiver of presentment and notice of dishonor under UCC §3-504, governing law, and venue. When a payment is missed, this clause is what makes a formal demand letter for payment worth sending before filing suit.

California caps interest under article XV, section 1 of the state Constitution at ten percent per year for loans made primarily for personal, family, or household purposes, and for other loans at the higher of ten percent or five percent above the Federal Reserve Bank of San Francisco rate. Lenders licensed under the California Financing Law, Cal. Fin. Code §22000 et seq., are exempt, which is why the ceiling bites hardest on private parties. A usurious note forfeits all interest, and Cal. Com. Code §3118 gives the holder six years to sue.

New York runs two tiers. General Obligations Law §5-501 fixes civil usury at sixteen percent, and Penal Law §190.40 makes anything above twenty-five percent criminal usury. Corporate makers cannot raise the civil defense under GOL §5-521(1), but the Court of Appeals confirmed in Adar Bays, LLC v. GeneSYS ID, Inc. that they may still plead criminal usury. The remedy is severe: the note is void and the lender loses principal as well as interest under GOL §5-511.

Texas applies usury rules to commercial paper as well as consumer paper, which surprises out-of-state lenders. Tex. Fin. Code §302.001 sets the default maximum at ten percent, while a written agreement may reach the ceiling published under Chapter 303, generally eighteen percent and higher for qualifying commercial loans. Penalties under §305.001 run to three times the excess interest.

Florida declares interest above eighteen percent usurious under Fla. Stat. §687.02 for loans at or below the statutory tier and allows up to twenty-five percent above it. Crossing twenty-five percent triggers §687.071, the criminal usury statute, and §687.04 strips the lender of all interest. Points, commissions, and origination fees count toward the rate in Florida as in New York, so a note that looks compliant can still be usurious once the charges are aggregated. Delaware sits at the other end, removing any ceiling on larger non-consumer loans under 6 Del. C. §2301.

You start by choosing the governing state, and the form adjusts the usury language, the default rate ceiling, and the statutory citations in the enforcement clauses. Next you identify the parties, indicating whether the maker is an individual, a married couple, or an entity, in which case the questionnaire asks for the state of organization and the signatory's title so the signature block does not create accidental personal liability. You enter the principal and the advance date, then pick the repayment architecture: on demand, single payment at maturity, or amortizing installments. Enter the rate and the form tests it against your state ceiling. From there you set prepayment, the late charge, the default rate, the cure period, and whether the note is secured, in which case the template cross-references the security agreement instead of trying to create the lien itself. A guarantor block and a notary acknowledgment are optional toggles. The LLC operating agreement drafted to your state's LLC Act is the natural companion when the maker is a company you also own.

The most frequent drafting error is a maturity term that fails the definite-time requirement. Language such as "payable when the borrower is able" destroys negotiability and hands the maker a defense, whereas a stated date or clean demand wording preserves the instrument. Running a close second is the rate that quietly exceeds the state ceiling once fees are aggregated, which is why the savings clause belongs in every note. Family lenders write the note at zero interest and discover later that IRC §7872 imputes a rate anyway.

Three procedural failures cause most of the litigation. Lenders take collateral and never file the UCC-1 or record the deed of trust, leaving an unsecured creditor holding a document that says "secured." They omit the acceleration clause, then sue installment by installment as each payment comes due. And they lose the original signed note, which forces reliance on UCC §3-309 and an indemnity to the maker. Keep the wet-ink original in a safe place and work from scans.