Promissory Notes Explained For Australian Businesses

If you run a business in Australia, there’ll be times when money needs to move quickly and clearly - whether you’re lending funds to a related entity, bridging cash flow, or formalising a short‑term advance from a founder.

Promissory notes are a simple, legally binding way to record that promise to pay. They keep things straightforward without the complexity of a full loan agreement - but they still need to be drafted properly to stand up if something goes wrong.

In this guide, we’ll unpack what a promissory note is, what to include, how they compare to loan agreements, how security and the PPSR fit in, and how enforcement works in Australia. By the end, you’ll know when a note is the right tool and when to step up to a more detailed contract.

What Is A Promissory Note?

A promissory note is a written, signed promise by one party (the borrower or “maker”) to pay a specified sum to another party (the lender or “payee”), either on demand or at a future date.

In Australia, promissory notes are recognised as negotiable instruments and are governed by the Bills of Exchange Act 1909 (Cth). In plain English, that means a well‑drafted note is a stand‑alone instrument that can be enforced on its terms, and in some cases transferred to another party who can then claim payment.

How Businesses Use Promissory Notes

• Short‑term advances or bridging finance between related entities or partners.
• Director or shareholder loans recorded on clear, simple terms.
• Quick documentation when lending to or borrowing from a trusted counterparty.
• Recording repayment obligations for expenses paid on behalf of a business.

Because they’re concise and quick to prepare, promissory notes are popular for straightforward, low‑complexity sums where the relationship is trusted and the timing is short to medium term.

Promissory Note vs Loan Agreement: Which Should You Use?

Both documents can record a loan - the difference is detail, risk allocation and the extras you may want (like security and guarantees).

• Promissory note: A concise promise to pay a fixed amount by a set date (or on demand), often with interest and simple default interest. It’s usually signed by the borrower. Ideal for low‑risk, simple scenarios and short time frames.
• Loan agreement: A fuller contract that sets out obligations of both parties, events of default, representations and warranties, repayment mechanics, early repayment, fees, security and dispute resolution. Best for larger sums, longer terms or where there’s more risk or complexity.

If you expect to include security over assets or a personal guarantee, or you need tailored default mechanics, a Loan Agreement is usually the better fit. Not sure which way to go? A quick chat with a contract lawyer can help you weigh up cost, complexity and risk.

What Should A Promissory Note Include?

To be effective and enforceable, your note should spell out the deal in clear, certain terms.

• Parties and details: Full legal names of the borrower and lender (include ABN/ACN if relevant).
• Principal amount: The exact sum owed.
• Date of issue: When the note takes effect.
• Repayment: On demand, or on a fixed date, or by instalments (list the dates and amounts).
• Interest: Rate, calculation method (simple/compound), and when it accrues. Note that interest is generally an input taxed financial supply for GST purposes (so no GST on interest), but it is still assessable for income tax.
• Default interest: A higher rate that applies to overdue sums (if you intend to charge it, say so and state the rate).
• Payment method: Bank details or other payment instructions.
• Transferability: Whether the lender may transfer or assign the note.
• Signatures: The borrower must sign. If the borrower is a company, ensure it’s signed in line with company signing rules.

Promissory Note Example (Simple Format)

Promissory Note

Date: 15 June 2025

Borrower (Maker): Jane Smith (ABN 12 345 678 901)
Address: 21 Smith Avenue, Bondi NSW 2026

Lender (Payee): John Doe (ABN 98 765 432 109)
Address: 10 Main Street, Sydney NSW 2000

Principal Amount: AUD $20,000.00

1. Promise To Pay
The Borrower unconditionally promises to pay the Lender the Principal Amount on or before 15 September 2025.

2. Interest
Interest accrues on the Principal Amount at 5% per annum (simple interest) from the Date until payment in full.

3. Default Interest
If any amount is unpaid when due, default interest accrues on the overdue amount at 7% per annum until paid.

4. Payment Method
Payment must be made in cleared funds to the Lender's nominated bank account.

5. Transfer
The Lender may transfer or assign its rights under this Note by written notice to the Borrower.

Signed by the Borrower:
Jane Smith

This example is intentionally simple. For larger sums, staged repayments, or where multiple entities are involved, it’s worth tailoring your note and getting it reviewed.

How Do Security, Guarantees And The PPSR Fit In?

A promissory note by itself records the obligation to pay - it doesn’t automatically give the lender rights over the borrower’s assets. If you want the right to repossess or rank ahead of other creditors, you need security.

Securing The Debt

In practice, this means putting a separate security agreement in place (for example, a General Security Agreement over all present and after‑acquired property, or a specific charge over nominated assets), and then recording that security on the Personal Property Securities Register (PPSR).

• Use a clear security agreement that describes the collateral and the obligations it secures.
• Register your security interest on the PPSR within the required time frames to perfect your interest and protect your priority position.

If you’re new to the PPSR, start with an overview of what the PPSR is and why it matters for your business. Sprintlaw can also help you register a security interest correctly so you don’t lose priority.

Personal Guarantees

If the borrower is a company with few assets, you may ask the directors or owners to personally guarantee the debt. A guarantee is typically a separate document that makes an individual legally responsible if the company doesn’t pay. There are pros, cons and risks to weigh up with personal guarantees, so it’s smart to get advice before relying on one.

Can A Promissory Note Be Transferred?

Yes, in many cases. Because a promissory note is a negotiable instrument, the lender may transfer their rights to another party (depending on how the note is drafted). Where you need a separate document to give effect to the transfer, you’ll typically use an assignment instrument. For broader contract rights, see our guide to the assignment of contracts.

Are Promissory Notes Enforceable In Australia?

Yes - provided the note is properly drafted and signed, courts regularly enforce them. The Bills of Exchange Act requires an unconditional promise to pay a sum certain, signed by the maker, payable on demand or at a determinable future time, to a specified payee (or to order/bearer if drafted that way).

Practical Steps If Payment Is Missed

• Check the terms: Confirm the due date, any grace period and whether default interest applies.
• Send a demand: A clear written demand often resolves things quickly and shows you’re serious.
• Escalate: If payment still doesn’t arrive, speak with a lawyer about debt recovery options (including using the note as evidence of the debt).
• Settle or release: If you reach a deal, record it in writing - for example, by documenting settlement terms and issuing a release once paid. Many businesses use a formal deed of release and settlement at the end of a dispute.

Getting the details right upfront makes enforcement far simpler later. Ambiguity creates room for dispute, so keep the language clear and the numbers certain.

Common Risks, Tax Points And Best Practice

Promissory notes are powerful in the right context - but they’re not the best fit for every scenario. Keep these practical points in mind.

Key Risks And Limitations

• Limited terms: A short note won’t cover the richer set of protections you’d find in a loan agreement (e.g. detailed default events, financial covenants, early repayment fees, specific remedies).
• No security by default: A note does not create a security interest on its own. If you want priority over assets, use a security agreement and PPSR registration.
• Evidence of funds: If the borrower later claims the money wasn’t advanced, you’ll want proof of the transfer (bank records, receipts). Keep your records tidy.
• Execution mistakes: Company borrowers should sign correctly to bind the company. If you need an individual to be on the hook, use a separate guarantee rather than assuming a director’s signature alone creates personal liability.

Taxes And Accounting (High‑Level)

• Interest and GST: Charging interest is generally an input taxed financial supply for GST purposes, so GST is not collected on interest. Interest may still be assessable income to the lender and deductible (subject to the usual rules) to the borrower.
• Withholding or reporting: Some cross‑border interest payments can attract withholding obligations. If you’re lending to or from overseas parties, get bespoke advice.
• Record‑keeping: Keep clear documentation of principal advanced, interest calculations and repayments. Good records support both enforcement and tax reporting.

Tax outcomes depend on your circumstances. It’s sensible to loop in your accountant alongside legal advice for larger or ongoing lending arrangements.

Practical Drafting Tips

• Use plain English and avoid ambiguity - spell out dates, amounts and rates precisely.
• Decide whether the note is payable on demand or on a fixed date, and say so clearly.
• If you want the ability to transfer the note, state that the payee may assign it.
• If repayment depends on instalments, list each instalment’s due date and amount.
• Make sure the borrower’s legal name is correct, especially for companies or trusts.

When in doubt, a short call with a contract lawyer can help you avoid common pitfalls and keep the note enforceable.

When To Use A Loan Agreement Instead

Step up to a loan agreement when any of these apply:

• A higher or long‑term amount, or variable interest.
• You need security or a personal guarantee drafted alongside the lending terms.
• You want comprehensive default events and tailored enforcement rights.
• Multiple lenders or borrowers are involved, or you need intercreditor terms.

In those cases, a purpose‑built Loan Agreement plus any security documents will give you the control and protection you need.

Key Takeaways

• A promissory note is a simple, legally binding promise to pay a fixed amount and is recognised in Australia under the Bills of Exchange Act 1909 (Cth).
• Notes suit straightforward, short‑to‑medium‑term lending between trusted parties; for larger or riskier deals, use a fuller Loan Agreement.
• Security is not automatic - if you want priority over assets, put a security agreement in place and register your security interest on the PPSR.
• Consider a personal guarantee where the borrower is a thinly capitalised company, and ensure the note is signed correctly.
• Interest is generally input taxed for GST purposes (no GST on interest), but it’s still subject to income tax rules - keep clean records and get accountant input for bigger arrangements.
• Clarity is everything: certain amounts, dates, interest and default terms make enforcement faster and less costly if payment is missed.

If you’d like a consultation on preparing a promissory note, adding PPSR security or moving to a tailored loan agreement, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.