Loan & Promissory Notes UK: Charity Fundraising Guide

Overview

A loan note and a promissory note are both written records of a debt, but they sit at different ends of the complexity scale. A promissory note is the simpler of the two. In essence, it is a signed, dated written promise by one party (the maker, usually the borrowing organisation) to pay a stated sum to another party (the payee, the lender) either on demand or on a fixed future date.

The document is short, the obligations are clear, and historically promissory notes have been treated as negotiable, meaning the right to be repaid can be passed on to someone else. A loan note is a more developed version of the same idea.

It tends to cover longer repayment periods, may involve interest, can include covenants about what the borrower can and cannot do while the debt is outstanding, and is often the instrument of choice where an organisation wants to raise a larger sum from multiple supporters on consistent terms. For a charity or unincorporated club looking to borrow small amounts from individual members, a promissory note is usually the right fit. For something more structured, a loan note may be more suitable.

Key steps

1. Work out what you actually need. Before reaching for any paperwork, the committee or trustees should agree the purpose of the borrowing, the sum required, who you expect to lend, and how and when the money will be repaid. A loan that cannot realistically be repaid from future income creates problems for everyone.
2. Check your governing document and regulatory position. Charities must borrow in line with their constitution or trust deed, and trustees have duties under charity law about incurring debt. Clubs limited by guarantee should check the articles, and unincorporated associations need to be careful about personal liability. If this applies to your situation, a conversation with an adviser is worthwhile.
3. Choose the right instrument. For a small, short-term loan from a single supporter, a promissory note is usually enough. Where several people are lending on the same terms, or the sum is larger and the repayment period longer, a loan note structure tends to be more appropriate. The choice shapes how the document is drafted.
4. Agree the commercial terms clearly. Write down the amount, the repayment date or trigger, whether any interest is payable, whether the note can be transferred, and what happens if the organisation cannot pay on time. Ambiguity here is what causes disputes later, so the clearer the terms, the better.
5. Sign, date, and keep proper records. Once the terms are agreed, the document should be signed by an authorised officer of the organisation and, where appropriate, witnessed. Keep the original safe, give the lender a copy, and record the debt in the accounts. Trustees should minute the decision to borrow.

Common questions