Purpose of Commercial Loan Agreements Guide

 A promissory note, by contrast, is simply a written promise by the borrower to pay a stated amount of money in accordance with certain terms, which include the principal amount of the loan, a specified rate of interest, and a maturity date.  The main difference between a loan agreement and a promissory note is length. Promissory notes typically are much shorter and less detailed than loan agreements. Moreover, promissory notes often are used together with loan agreements to provide supplemental evidence of the promises to pay the amounts specified in the loan agreement. Occasionally, the debt obligation represented by a promissory note is secured by the borrower’s specific assets, in which case the promissory note may be called a collateral note. Although promissory notes are not essential, because a loan agreement alone sufficiently records the transaction and binds the parties, they may provide some advantages to the borrower in certain jurisdictions. (For more information, see “Alternatives to a Loan Agreement—Promissory Notes.”) This guidebook addresses only standard commercial loan agreements governed by laws of common law legal systems.1 However, it does flag, in broad terms, some notable distinctions between the way common and civil law handle terms and practices with respect to loan agreements and promissory notes. The type of legal system that applies to the loan agreement is critical, because common law and civil law legal systems involve different approaches to the respective rights of creditors and debtors. Common law and civil law systems may use different legal terms; may recognize different types of liens (legal interests in the borrower’s assets); may offer different types of self-help remedies to creditors; and may apply, through local courts, different interpretations to terms and conditions. Borrowers should ask local legal counsel whether the law governing the loan agreement follows common law or civil law principles and what the related

implications are. Indeed, borrowers should seek local counsel to understand how this issue (as

well as a number of other issues highlighted throughout this handbook) applies to them.

This guidebook describes various loan agreement structures and standard provisions,

including those relating to representations and warranties, covenants, events of default,

remedies, enforcement, and confidentiality. It also covers commercial loan agreements and

certain alternative loan products, defines loan agreement terminology, and explains the

risks and benefits of some common loan structures.