How to Transfer Promissory Notes

By Owen E. Richason IV
Transfer Promissory Notes

Jupiterimages/Photos.com/Getty Images

A promissory note is, "a written document in which a borrower agrees (promises) to pay back money to a lender according to specified terms," as defined by the Lectric Law Library. Often, in business dealings between a new start-up company and an investor, the investor will provide seed money or start-up money to the business. The business will issue a promissory note to the investor stating it will repay the money under certain terms agreed to by both parties. If the business is sold prior to repayment, the promissory note will have to be transferred.

Determine the type of promissory note. To transfer a promissory note, it must be negotiable and/or have a provision that allows and explains transfer. In addition, it must comply with state statutes governing promissory notes and assignments thereof.

Create a Promissory Note Transfer Agreement. Name the grantor of the promissory note --- the person or business to whom the money is owed and the assignee, or person or business the promissory note is being transferred to.

Include descriptive language in the transfer agreement. Detail the provisions of the promissory note, such as the amount owed, the term or length of the promissory note, the options for repayment by cash, transfer of assets or a percentage of a business or percentage of proceeds from sale of property.

Insert a transfer provision. Include a section that specifically disallows further transfer of the promissory note to another party, unless acceptable by all persons or entities involved in the initial transfer.

Include modification terms. Put in modification terms, such as extending the promissory note term length, collecting partial payments or any other circumstance that might change the fundamental aspects of the promissory note.

Sign the transfer agreement. With all parties present, review and sign the promissory note transfer agreement before a witness. Make copies of the executed agreement and provide each party with a copy of the transfer agreement.

About the Author

Owen Richason grew up working in his family's small contracting business. He later became an outplacement consultant, then a retail business consultant. Richason is a former personal finance and business writer for "Tampa Bay Business and Financier." He now writes for various publications, websites and blogs.