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In corporate finance, a note payable is a contractual financing arrangement where one party borrows money and repays it to another over a specified period, usually with interest.

Notes payable impact the operational capabilities and financial health of an organization and understanding them is imperative for anyone involved in business finance.

In this article, we’ll explore what notes payable are, how they impact financial statement reporting, and how they differ from other financial instruments like accounts payable and notes receivable.

Furthermore, we’ll explore some common uses for notes payable and their implications for a company’s financial success.

Let’s dive in.

What are notes payable?

A note is a financing agreement between two parties where one party loans money to another, and the other party repays it in installments over time.

The party who loans money is known as the “creditor” and the party receiving money is the “debtor”. Because the debtor has an obligation to repay the creditor, the debtor is said to have a note payable.

A debtor might use the proceeds from a note to:

  • Refinance debt
  • Secure working capital
  • Buy equipment or real estate
  • Acquire businesses or other assets

Notes can either be short-term or long-term in nature. Short-term notes are due within one year, while long-term notes have repayment periods ranging from 1 year to 30 years or more. The repayment period (commonly called the “term”) depends on the loan’s purpose and the collateral securing it.

For example, a working capital loan might have a repayment term of 18-24 months, while a real estate loan might have a term of 25 years or more.

Repayment periods are outlined in the note’s credit agreement, which is a legal contract that governs the relationship between the debtor and the creditor. Credit agreements also specify the loan’s interest rate, payment frequency, late payment penalties, fees, covenants, and the lender’s specific rights if the borrower can’t pay.

Notes which are secured by collateral are known as “secured debt”, while notes which are not secured by collateral are known as “unsecured debt”.

Notes payable require careful financial planning from upper management to ensure a company’s liquidity and long-term financial success. Failure to consider these aspects can have long-term adverse consequences for a business.

Where do notes payable appear on financial statements?

Notes payable are recorded as long-term liabilities on a company’s balance sheet because they represent debts with repayment periods that extend beyond the next 12 months. 

On a balance sheet, you might also see notes payable referred to as “long-term debt”, “promissory notes”, or just simply “loans”.

When you come across notes payable on a balance sheet, you’ll also probably find the following entries on its financial statements:

  • Current Portion of Debt (CPLTD): this entry represents the loan principal payable in the coming 12 months. CPTLD is reported under current liabilities on the company’s balance sheet.
  • Interest Expense: this entry represents the cost of borrowing debt for the selected reporting period. Interest expense appears on the income statement.
  • Fixed Assets: this entry represents the company’s tangible long-term assets which are detailed on the balance sheet. Some examples of fixed assets include real estate, equipment, and vehicles. Intangible assets, such as goodwill, are typically shown separately.

Large private and public companies also publish debt schedules, which provide detail on a company’s indebtedness. Debt schedules typically contain names of lenders, the current balance of each note, respective interest rates, the collateral securing each note, and so on.

How do notes payable differ from accounts payable?

Notes payable and accounts payable are both liabilities on a company’s balance sheet, but they differ significantly in their nature and terms.

Accounts payable represent short-term obligations to pay for goods or services received during the ordinary course of business. Accounts payable are commonly used by capital-intensive businesses (like manufacturers and retailers) that regularly work with suppliers.

Unlike notes payable, accounts payable don’t typically involve an upfront exchange of capital. Instead, the seller extends credit to the buyer, which allows the buyer to pay at a later date without incurring interest or penalties.

Accounts payable are typically settled according to “net terms” which specify the length of time a buyer has to pay for goods or services received. For example, “net 30” means that a buyer must pay the full balance within 30 days of receipt. Once payment is made, the liability is satisfied and the account is cleared.

While accounts payable are not typically governed by credit agreements, the supplier may impose late fees or stop providing goods or services if the buyer fails to pay on time.

Regarding accounting treatment, accounts payable appear as current liabilities on the balance sheet as they are typically short-term in nature. Other common names for accounts payable include “trade payables” or “vendor payables”.

How do notes payable differ from notes receivable?

While notes payable represent a debtor’s obligation to repay borrowed capital, a note receivable represents a creditor’s right to receive payment for capital lent. 

As previously discussed, the terms of repayment are outlined within a credit agreement between the two parties.

Notes receivable can be short-term or long-term in nature and are recorded on the balance sheet. If a note is collectible in full within 12 months, you’ll find it classified as a current asset. If a note is collectible over a period longer than 12 months, it’s a non-current asset.

Managing notes payable commitments

Whether you’re a financial analyst or a manager, understanding notes payable is crucial in effective financial management and strategic planning.

Notes payable represent a formal borrowing commitment which requires both parties to carefully consider repayment terms and financial impacts.

Notes payable differ from accounts payable in that the former involves an upfront exchange of capital and a signed credit agreement which governs the relationship between the two parties. Accounts payable, on the other hand, are typically less formal and arise out of the ordinary course of business.

Effectively managing these commitments is essential in maintaining a business’s financial health and supporting its long-term objectives.

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Founder, BizBuyGuide.com
Philip is a seasoned finance expert and founder of BizBuyGuide.com, an online platform for buyers and sellers seeking to grow their wealth via business ownership. Philip has a strong underwriting background and specializes in helping business owners navigate the complexities of the SBA 7a loan program. Prior to founding BizBuyGuide, Philip worked in corporate finance and business lending for 15 years, having worked with small startups, franchise owners, real estate investors, and major corporations generating over $1 billion in revenues. Philip is a CFA charterholder, holds an MBA, and is a licensed business broker in the state of Arizona.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

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