A promissory note is a promise by the borrower to repay the lender on a specific date or dates, usually with interest. These can be difficult to collect, and often the borrower is disinclined to pay the lender back within the given time frame -- if at all.
In my experience there have been more worthless notes than good ones. Strange as it may seem, the worst promissory notes have come from friends, and the closer the friend the worse the note. When a person is in need of funds he naturally turns to the people who can least refuse himand these are often his friends.
It is most difficult to say you are a friend in one breath and refuse to lend $1,000 in the next. It is well in such a case to remember that the person wanting the loan had no hesitation about asking you for your hard earned money. For many years I have had a stock reply ready to friends who ask for loans: "That's funny; I was just going to ask you for a loan."
Such an attitude may seem hard and cold, but it was developed after I had lost over $35,000 lent to various friends over the years.
Early in my business career I got the right answer, but I guess I forgot it. Shortly after I was out of college and working in New York, a friend of mine who also lived in the YMCA asked me to lend him some money because he had no funds with which to buy meals. Since I then had the princely salary of $31.15 a week I felt I should let this friend in need have some money. I did$10 but as far as I went it was not a loan. It was a gift. I never expected to get it back and I never did.
Years later the same friend asked me for a loan of $1,500 to buy a business. I inquired whether he would give me a second mortgage on his property. He became indignant and told me I was no friend to ask for collateral, that his word should be good enough. Perhaps his word became more valuable over a period of 20 years!
There are some loans, which you must make to friends in need or to relatives. These should in no way be considered business propositions, however. They are charity and should be judged on the basis of charitable contributions but with the added feature of there being a small chance, perhaps one in ten, that you will get back your funds. This is not a business proposition. I will, however, in a later installment, describe in some detail how a friend managed to get away with no less than $28,000 of my money.
There are three essential elements to a promissory note besides the legality of the note in the state in which it is used, and these are the integrity of the borrower, the soundness of his assets and a sound use to which the money is to be put. These elements must be present or else the loan is a poor one.
Sad as it might seem, it is always advisable to create a promissory note or other legally binding document before loaning anyone, even friends, a sizeable amount of money. It is a rather dark side of human nature to take something without intention of returning it, but unfortunately many people take advantage of others' kindness. In the end, it's best to simply avoid the situation altogether.