In many B2B transactions, companies accept deferred payment terms. This is common in commercial relationships, but it can create pressure on cash flow when clients delay payment or fail to pay.
A promissory note in Romania can be a useful legal and financial tool in these situations. It helps creditors secure payment, recover debts more efficiently and, in some cases, obtain liquidity before the payment deadline.
Below are the main advantages for companies using promissory notes in business transactions.
1. Faster debt recovery
A valid promissory note is an enforceable title.
This means that, if payment is refused, the creditor may start enforcement proceedings without first obtaining a final court judgment on the debt. As a result, recovery may be faster and less costly than a standard court claim.
If the promissory note also includes a waiver of protest, the creditor may avoid additional formalities before enforcement. This can be especially useful when speed is important for maintaining cash flow.
2. Additional security through aval
Payment under a promissory note can be guaranteed by aval, which is a specific guarantee used for negotiable instruments. The person or company giving the aval is usually called an aval guarantor or avalist. The avalist may be, for example:
- a shareholder;
- a director;
- a company from the same group;
- another solvent third party.
This gives the creditor an additional party to claim payment from if the issuer does not pay.
3. Transfer to another business partner
A promissory note can also be transferred by endorsement. For example, Company X holds a promissory note issued by Company Y. Before maturity, Company X needs to pay Company Z for raw materials. If Company Z agrees, Company X may endorse the promissory note to Company Z.
Company Z then becomes the holder of the instrument and may request payment from Company Y at maturity.
This can help companies settle obligations without immediate cash payment. However, if Company Y refuses to pay, Company Z may also have claims against Company X, depending on the endorsement chain.
4. Access to liquidity before maturity
A promissory note may also be discounted with a bank or financial institution. In this case, the holder receives money before the maturity date. The amount is usually reduced by interest, fees and discount costs.
This can provide short-term liquidity and help the company continue its operations or pay suppliers. However, if the issuer does not pay at maturity, the financial institution may have recourse against the company that transferred the promissory note.
5. Stronger position for the creditor
A promissory note is generally independent from the underlying commercial contract. This means that the parties liable under the instrument may have limited defences against a good-faith holder. In practice, this can strengthen the creditor’s position.
In addition, refusal to pay a promissory note due to lack of funds may be recorded as a payment incident with the Romanian Payment Incidents Register. This may affect the debtor’s financial reputation.
Need legal assistance with a promissory note in Romania? We assist companies with drafting, reviewing and enforcing promissory notes in Romania, including aval guarantees, endorsement, discounting and payment risk assessment.
For a detailed analysis in Romanian, see the author’s full article published on Avocatnet.ro