Promissory Note Line of Credit Template

In plain language: Identifies the lender and borrower as legal entities and states the maximum aggregate amount the lender commits to advance under the facility.

Common mistake: Using trade names instead of registered legal entity names. If the lender or borrower entity name does not match public records, enforcement through courts or insolvency proceedings becomes complicated and slower.

In plain language: Specifies how the borrower requests a draw — minimum draw amount, notice period, the form of the draw request, and how funds are disbursed.

Common mistake: Omitting a minimum draw amount and advance notice requirement. Without these, the borrower can demand draws of any size at any time, creating cash-flow management problems for the lender.

In plain language: States the interest rate, whether fixed or variable, the day-count convention for calculating interest, and when interest accrues.

Common mistake: Failing to specify the day-count convention (365 vs. 360 days). A 360-day year convention increases the effective interest cost by approximately 1.4% and must be disclosed explicitly to avoid usury or disclosure disputes.

In plain language: Defines when and how the borrower repays drawn amounts — interest-only during the draw period, minimum monthly payments, or full repayment at maturity.

Common mistake: Setting an interest-only payment schedule with no principal reduction requirement, then failing to include a maturity date. This creates an indefinite obligation with no clear repayment horizon, which courts in some jurisdictions treat as a demand obligation.

In plain language: Sets the date after which no new draws may be requested and the date by which all amounts must be repaid.

Common mistake: Conflating the draw period end date with the maturity date. If draws stop when the note matures, the borrower has no wind-down period to arrange repayment — causing technical default on day one of the repayment period.

In plain language: States whether the borrower may repay early without penalty, whether prepayment restores available credit, and any prepayment fee.

Common mistake: Omitting whether prepayment restores available credit. For a revolving facility this is the key mechanical distinction from a term loan — leaving it out creates disputes about whether the borrower can redraw after repaying.

In plain language: Lists events that constitute a default — missed payments, insolvency, misrepresentation — and gives the borrower a defined cure window before the lender can accelerate.

Common mistake: No cure period for payment defaults. Without a cure window, a single late payment triggers immediate acceleration — a disproportionate remedy that courts sometimes decline to enforce and that destroys the commercial relationship.

In plain language: Gives the lender the right to declare all outstanding amounts immediately due upon an uncured default event.

Common mistake: Writing an automatic acceleration clause with no lender discretion. Automatic acceleration removes the lender's flexibility to work with a borrower in temporary distress and can trigger cross-default provisions in the borrower's other agreements unintentionally.

In plain language: Specifies which jurisdiction's laws govern the note and how disputes are resolved — litigation, arbitration, or mediation.

Common mistake: Choosing a governing law with no connection to either party's location. Several states — including California and New York — will apply local usury and disclosure laws regardless of a contrary governing-law clause.

In plain language: Documents that the borrower waives presentment, demand, protest, and notice of dishonor, and that the note represents the entire agreement between the parties on this credit facility.

Common mistake: No integration clause. Without it, prior emails or term sheets can be introduced to vary the note's terms — a particular risk when the credit line was negotiated informally before the note was drafted.

A promissory note line of credit is a binding legal instrument in which a lender commits to advance funds up to a defined credit limit on a revolving basis, and the borrower promises to repay all drawn amounts with interest under the stated terms. Unlike a standard promissory note that documents a single lump-sum loan, a line-of-credit note allows the borrower to draw, repay, and redraw repeatedly throughout the facility's term, up to the credit limit at any given time.

A standard promissory note documents a single fixed advance — the full loan amount is disbursed at once and repaid on a set schedule. A promissory note line of credit is an open-end instrument that authorizes multiple advances up to a maximum limit; the outstanding balance fluctuates as the borrower draws and repays. The key distinction is flexibility: the borrower accesses only what is needed and replenishes available credit by making repayments, making it better suited for working capital and ongoing operational funding needs.

In most US states, notarization is not required for a promissory note line of credit to be legally enforceable between the parties. However, if the note is secured by real property and the security instrument needs to be recorded, the associated deed of trust or mortgage will typically require notarization. Some international jurisdictions — and certain US states for commercial loans above a threshold — may impose additional formality requirements, so confirm the rules in the governing jurisdiction before execution.

Yes — intercompany lines of credit are one of the most common uses of this instrument. However, the terms must reflect arm's-length commercial rates and conditions to avoid tax recharacterization as a dividend or capital contribution. Tax authorities in the US, Canada, and most EU member states require that intercompany loans carry a market interest rate and be documented with a signed note before the first advance. Failure to do so can result in the deemed distribution of the advanced amounts as taxable income to the borrower's shareholders.

The rate must comply with the usury ceiling of the governing jurisdiction for the loan type and amount. For US commercial lines of credit between businesses, many states exempt loans above a certain threshold (often $25,000–$100,000) from usury limits entirely. A common benchmark for private commercial lines is the Wall Street Journal Prime Rate plus a spread of 1–4 percentage points. For intercompany loans, the IRS Applicable Federal Rate (AFR) sets the minimum rate to avoid imputed interest. Always confirm compliance before signing.

Upon an uncured default, the lender may invoke the acceleration clause to declare all outstanding principal and accrued interest immediately due. The lender can then pursue collection through litigation, seek summary judgment on the note (which is generally straightforward given its negotiable-instrument status), garnish bank accounts, or — if the note is secured — foreclose on the collateral. The note's governing law determines the procedural steps, statutes of limitation, and any required pre-litigation notices.

Interest accrues daily on the actual outstanding principal balance — not the full credit limit. If the borrower has drawn $50,000 against a $200,000 line at 8% per annum on a 365-day basis, the daily interest cost is $50,000 × 0.08 / 365 = approximately $10.96 per day. As the borrower repays principal, the accruing interest decreases; as additional draws are made, it increases. The note should specify whether accrued interest is paid monthly or capitalized.

They serve a similar economic purpose but are different instruments. A promissory note is a negotiable instrument — a written promise to pay — that can in principle be transferred to a third party. A loan agreement is a bilateral contract that sets out the full commercial terms of a lending relationship but is generally not negotiable. In practice, many sophisticated lending transactions use both: a loan agreement governs the relationship and covenants, while a promissory note evidences the debt and can be held as collateral or pledged to a senior lender.

Yes, but a credit limit increase typically requires a written amendment signed by both parties, or a new note replacing the original. The note should include an amendment clause that specifies the form required for any modification — oral modifications are generally unenforceable for credit instruments, and a no-oral-modification clause makes that explicit.

For straightforward private lines of credit between businesses in a single jurisdiction, a high-quality template is a suitable starting point. Legal review is advisable when the credit limit exceeds $100,000, when the note is secured by real or personal property, when the parties are in different countries, when the borrower is a regulated entity, or when the lender intends to pledge or sell the note. A lawyer can confirm usury compliance, draft appropriate security documentation, and tailor default remedies to the specific risk profile of the transaction.