When and on what basis can a promissory note be a loan repayment security?
Borrowing secured loans is a relatively common practice today. The most common practice is the provision of mortgage loans secured, for example, on real estate. However, it turns out that it is not all available collateral, credit or other obligations that can be secured – through a promissory note. What does it mean?
Let’s start from the beginning, what is the bill of exchange?
Presenting the essence of a promissory note, the easiest way is to indicate that it is a security paper, a document based on which – by signing? the exhibitor undertakes to assume a specific obligation. The details of issuing bills of exchange, as well as their trading in the Polish legal system are governed by bill of exchange law. The following elements determine whether a given bill can actually be considered as properly issued, binding:
- Designation of the securities name: bill of exchange;
- The essence of the obligation: a provision stating that the promissory note issuer undertakes (without any conditions, special conditions) to pay a specified sum of money;
- Indication of who is a trasatta, ie an entity obliged to pay the sum of money indicated in the bill of exchange;
- Indication of the payment details, i.e. time and place in which the payment of the amount indicated in the bill of exchange is to be effected;
- Indication of the entity to which the payment is to be made, the amount of money indicated in the bill of exchange;
- Certification of the bill issuing the bill, in particular its signature, indication of the place, date of issue of the bill of exchange.
The promissory note may be a loan security, it results from its functions – which?
For the promissory note to be the security for the repayment of, for example, credit obligations, first and foremost the functions it fulfills. The most important ones are:
- Payment function – presenting a bill of exchange for a given amount is the basis for the entity indicated in it to pay a specified sum of money;
- Credit function – on the basis of issuing a promissory note in the trade, the parties postpone the date of payment for the goods;
- Guarantee function – a promissory note is a security for payment of monetary obligations;
- Circulation function – a bill of exchange and the rights resulting from it for a party may be transferred, transferred to other persons.
How to establish a loan security by bill?
Establishment of loan repayment security by just issuing a promissory note is possible. In practice, it looks like a bill of exchange is being prepared, but it is not a bill with all completely completed information, rather a promissory note about the attributes of a blank promissory note. This means that you do not enter, for example, information on the amount of the bill of exchange, or date of payment. This type of data is saved in additional documents, accepted and issued to such a promissory note. There are cases where an additional note on his issued promissory note is added about his immediate enforceability at an appropriate time, without any objection to the Borrower – the bill of exchange.
What gives credit security by bill?
The effects or advantages of establishing such collateral are dual, different for the Bank and the Borrower. In the case of the Bank, issuing such a promissory note is even more effective in securing that the Bank will recover funds entrusted to a given person. If, because it would evade credit repayment, it was terminated, then the Bank does not have to conduct a large debt collection and enforcement procedure, but it can immediately proceed with the bill of exchange, which means sending the case to the bailiff’s execution. Thus, such promissory note at least indirectly minimizes the banking risk associated with borrowing funds to a given person.
From the Borrower’s side, in certain circumstances, issuing such a promissory note is probably dangerous. When the Borrower will have problems with settling the loan obligation, there is a risk that the promissory note will be processed relatively soon and that the bailiff will be executed against it. Securing the loan through a promissory note is therefore beneficial for the Borrower only if this is not how to establish a collateral for the repayment of the liability, and this is a condition for obtaining a loan (for example, no property to be owned, a guarantor with creditworthiness). Then issuing such a promissory note increases the credibility level of the person applying for a loan. For a group of Borrowers issuing such a promissory note seems to be a more convenient solution than, for example, establishing a security for a loan on a housing property, which involves carrying out many formal activities (eg mortgage entry in the land and mortgage register).
Finally, it should be noted that the bill of exchange performs many functions, including: credit, guarantee and payment. Due to this, it may also constitute a security for repayment of a loan obligation. Such a promissory note significantly reduces the Bank’s risk connected with providing a given sum of money to a given person. A borrower who consents to such a loan collateral must, however, be aware that if he does not fulfill the contract under the contract, repay the loan obligation in accordance with the contract, the Bank may proceed with the promissory note, which usually takes the form of the initiation of bailiff enforcement proceedings For this reason.