A loan note is a legal document that signifies a person owes money to someone else. Typically, loan notes exist when a buyer buys an item on credit. A loan note is written to indicate that the buyer owes the seller money for the item he has purchased.
A loan note generally details the terms of the loan itself. For example, it may indicate how much a buyer has borrowed or the value of the goods the borrower is taking and must pay for; this is sometimes referred to as the principal. The note will also indicate the interest rate charged on the money borrowed and the time period in which the borrower must pay back the loan.
The loan note has tangible valuable. It is legally binding, which means the person who bought the goods and owes the money is legally obligated to pay back the money he owes. Failure to pay back the loan amount can result in a legal judgment against the borrower.
Because the loan note has value, it can be sold or traded. This means the note is transferable. The holder of a loan note may opt to sell the note to obtain immediate cash to expand his business or to purchase other assets; if this occurs, the debtor still owes the money but he now owes it to whomever the original lender sold the note to.
Such notes are commonly used in business. A retail store, for example, may borrow goods and a note may be written dictating how much the retail store must pay back. When the store sells the inventory, the note is paid back from the proceeds. This enables stores to do business without a great amount of excess capital or funds to pay for products before they are sold.
Buying and selling of loan notes is also common. Banks and private businesses or investors can all engage in the practice of selling loan notes. Selling a loan note enables a company to increase its liquidity by turning the debt into a cash asset immediately, and it can also be lucrative to an individual who sells the note for more than the total amount the debtor owes. It also enables the buyer of the note to make money because he is able to collect both the principal and the interest payments from the original debtor named on the loan note.