Is a Promissory Note Enough When Lending Money in Ontario?

A promissory note can be an important lending document, but it does not automatically make a loan secure. A lender can have a perfectly clear written promise to repay and still recover little or nothing if the borrower defaults and has no available assets.

I’m Raz Toor, the founder of Falcon Law PC. We advise businesses, shareholders, investors and private lenders on promissory notes, shareholder loans, guarantees, security agreements, vendor financing and other commercial lending arrangements.

The question I would ask before advancing money is not simply, “Do I have something in writing?” The more important questions are: Who owes the money, what assets stand behind the obligation, where do I rank against other creditors, and what happens if the borrower does not pay?

What Is a Promissory Note?

Canada’s federal Bills of Exchange Act defines a promissory note as an unconditional written promise, signed by the maker, to pay a specified sum of money on demand or at a fixed or determinable future time.

In a private lending transaction, the note will commonly identify the lender and borrower, principal amount, interest rate, payment schedule or maturity date and circumstances in which the debt becomes due.

A properly structured note can therefore be strong evidence that the borrower owes the lender money. What it does not necessarily do is give the lender rights over any particular asset.

Is a Promissory Note Enough?

Sometimes it can be, if the lender deliberately intends to make an unsecured loan and understands the credit risk. For example, a lender may be comfortable lending a modest amount to a financially strong borrower without collateral.

For a significant private loan, shareholder loan, business loan or vendor-financing arrangement, however, I would usually look beyond the note itself. The lender should understand whether guarantees, security, registrations, covenants or other protections are appropriate before the funds are advanced.

The Difference Between a Debt and Security

A promissory note establishes a payment obligation. Security gives the lender rights in identified property if the debt is not repaid.

Those concepts should not be confused.

Suppose a corporation signs a promissory note for $200,000. The document clearly says that the corporation owes the lender $200,000 plus interest.

If the corporation later becomes insolvent and all of its valuable assets are already subject to a bank’s security, the lender may still have a valid $200,000 claim while recovering only a fraction of it—or potentially nothing.

The note proves the debt. It does not necessarily establish priority over the assets.

What Does It Mean to Be an Unsecured Creditor?

If the lender has no valid security over the borrower’s property, the lender will generally be relying on the borrower’s contractual promise to pay.

If the borrower defaults, the lender may be able to sue, obtain judgment and pursue enforcement. But if the assets are already pledged to secured creditors or the borrower has become insolvent, collection can be substantially more difficult.

This is why I distinguish between enforceability and collectability. Winning the legal argument about what is owed does not create assets that are available to satisfy the debt.

A Promissory Note Is Not the Same as a Loan Agreement

A promissory note can be a relatively concise debt instrument. A loan agreement can govern the broader commercial relationship.

For a larger transaction, the loan agreement may address representations about the borrower, conditions that must be satisfied before funding, permitted use of the money, financial reporting, restrictions on additional borrowing, security, insurance, events of default, acceleration, costs, amendments and other ongoing obligations.

The promissory note can then exist alongside that agreement as evidence of the payment obligation.

Whether both documents are necessary depends on the transaction. The important point is that a one-page note should not be forced to perform every function of a complete lending arrangement where the circumstances require more protection.

Lending Money to a Corporation Creates a Particular Risk

If the borrower is a corporation, the corporation is generally the debtor—not automatically the individual who owns or manages it.

For example, if ABC Consulting Inc. signs a $100,000 promissory note and the owner signs only in their capacity as president of the corporation, the lender should not simply assume the president personally owes the $100,000.

If personal recourse is intended, that should ordinarily be documented through an appropriate personal guarantee or other obligation.

What Does a Personal Guarantee Add?

A personal guarantee can give the lender an additional person to pursue if the corporate borrower defaults. This may materially improve the lender’s position where the corporation has few assets but its principal has meaningful personal assets.

A guarantee still does not necessarily make the debt secured. It expands the persons against whom the lender may have recourse, but the guarantor’s particular assets may still be encumbered or unavailable.

The guarantee should also be drafted carefully. The parties should understand whether it is limited or unlimited, continuing or transaction-specific, whether amendments to the underlying debt affect it and what enforcement rights arise on default.

Security Over Business Assets

Where an Ontario business borrower owns meaningful personal property, the lender may consider taking a security interest under Ontario’s Personal Property Security Act, commonly called the PPSA.

The legal documents may include a general security agreement or a more limited security agreement describing particular collateral.

A general security agreement can potentially cover broad categories of the borrower’s present and after-acquired personal property, subject to its wording, the PPSA and other applicable law.

The lender should not stop with the security agreement. Registration under Ontario’s Personal Property Security Registration system can be an important part of perfecting and protecting the lender’s security interest and establishing priority against competing interests.

The Security Agreement and PPSA Registration Do Different Things

This distinction is important.

The security agreement is generally the contract under which the borrower grants the lender the security interest. The PPSA financing statement is the public registration used to protect that interest against third parties in accordance with the statutory system.

Simply writing “this loan is secured by all company assets” in a promissory note without properly documenting and perfecting the security can leave the lender in a very different position than expected.

Search Before You Lend

A lender considering personal-property security should usually conduct a PPSA search before funding.

The search may show that a bank, equipment financier, shareholder or another lender already has registered security against the borrower.

This can completely change the commercial analysis.

A lender may believe it is receiving valuable security over a company’s equipment, inventory and accounts receivable, only to discover that a bank already has first-ranking security over substantially all of those assets.

First Security Is Usually More Valuable Than Second Security

Priority can matter as much as the value of the collateral.

Assume a borrower owns $500,000 in realizable business assets but a bank is owed $450,000 and has first-ranking security over those assets. A new lender receiving second-ranking security should not assume there is $500,000 available to secure its loan.

The economic value of the lender’s security may be only the residual value remaining after the prior-ranking creditor is paid, subject to other claims and enforcement costs.

This is why the borrower should disclose existing financing and the lender should conduct appropriate searches rather than relying only on what the borrower says.

Existing Bank Financing Can Restrict New Security

A company’s existing loan agreement may prohibit it from granting new security without the bank’s consent.

The bank may also require a new lender to sign a postponement or subordination agreement.

Where there are several creditors, an intercreditor or priority agreement may establish who ranks first, what enforcement rights each lender has and whether one lender must wait before taking action.

These issues should be addressed before funding rather than after default.

Security Over Real Estate

If the borrower owns real property, the lender may consider taking a registered mortgage or charge rather than relying only on a promissory note.

The lender should review title, existing mortgages, property value, insurance and available equity before advancing funds.

A second mortgage can still provide meaningful security, but its value depends heavily on the amount owing to the first mortgagee and the realizable value of the property.

The fact that someone owns a million-dollar property does not mean a lender has a million dollars of security if the property is already heavily financed.

Security Over Shares

In some commercial arrangements, shares of a corporation may be pledged as security.

This is common in certain acquisition, investment and shareholder-financing arrangements.

Before relying on a share pledge, the lender should review the corporation’s articles, securities register, shareholder agreement and existing financing arrangements. There may be restrictions on transfer, requirements for approval or other rights held by shareholders or lenders.

A share pledge is also only as valuable as the underlying corporation. Shares in an insolvent company may provide little practical protection.

Shareholder Loans Should Be Documented

Business owners commonly advance money to their own corporations.

Those amounts are sometimes recorded casually in the accounting records as “shareholder loan” without any actual lending documents.

For material advances, the shareholders should consider documenting the amount, interest if applicable, repayment rights, maturity or demand terms, priority between shareholders and whether the advances will be secured.

This becomes especially important where several shareholders are advancing different amounts or where the company also has external bank financing.

Promissory Notes in Business Purchases

Promissory notes are also frequently used when buying and selling businesses.

A seller may agree that part of the purchase price will be paid over time. This is commonly referred to as vendor take-back financing or a seller note.

In that situation, the note should not be viewed in isolation.

The share purchase or asset purchase agreement may need to coordinate the note with representations and warranties, indemnity claims, set-off rights, senior bank financing, subordination, security, events of default and restrictions on assignment.

A seller receiving a $300,000 note as part of a business sale is effectively becoming a lender to the buyer. The seller should assess that credit risk just as another lender would.

Should the Lender Get Security for a Vendor Take-Back?

Potentially, although the buyer’s senior lender may restrict what security the seller can receive.

A bank financing the acquisition may insist that the seller’s note be subordinated to the bank loan. The bank may also require restrictions on when principal or interest can be paid and when the seller can enforce.

The seller therefore needs to understand not only the face amount of the note, but its practical ranking and enforceability within the financing structure.

Set-Off Rights Matter in Acquisition Notes

A buyer may want the ability to set amounts owing under indemnity claims against future seller-note payments.

The seller may resist broad set-off rights because they can delay payment of the purchase price.

This is a negotiated transaction point and should be addressed expressly. Otherwise, a dispute after closing can develop over whether the buyer must continue paying the note while simultaneously alleging that the seller owes money under the purchase agreement.

What Should Happen on Default?

The lending documents should clearly define default.

Non-payment is the obvious example, but depending on the transaction, other defaults may include insolvency, breach of the security documents, false representations, unauthorized asset sales, additional prohibited borrowing, failure to maintain insurance or a material breach of another transaction document.

The agreement should also state what happens next. This may include notice, a cure period, acceleration of the outstanding principal, enforcement of security or other contractual remedies.

Acceleration Should Be Clear

Suppose a borrower must make monthly payments for five years but misses one payment.

The documents should make clear whether the lender can demand only the missed payment or can accelerate the entire outstanding balance after the applicable default and cure provisions are satisfied.

Ambiguity becomes especially expensive once the relationship has broken down.

Demand Notes vs. Fixed-Term Notes

A promissory note may be payable on demand or at a specified maturity date.

Those structures serve different purposes.

A demand note can provide significant flexibility to the lender because the principal may become payable when a valid demand is made, subject to the document and applicable law.

A fixed-term note provides more certainty to the borrower about when repayment is due but should still deal with earlier default and acceleration.

Interest Should Be Drafted Carefully

The note should clearly state whether interest applies, the annual rate, how it is calculated, when it is payable and whether the rate changes after default.

The federal Interest Act contains specific rules where a written agreement expresses interest for a period shorter than a year. Subject to statutory exceptions, a monthly, weekly or daily rate should also include the equivalent annual rate if the lender expects to recover more than the statutory amount otherwise permitted.

Writing “2% per month” without considering the annual-rate disclosure rules can therefore create an avoidable problem.

There Is Also a Criminal Interest Rate

Canada’s Criminal Code currently defines the criminal rate generally as an annual percentage rate exceeding 35% on the credit advanced.

The calculation is broader than the stated interest rate alone. Certain fees, fines, penalties, commissions and other charges connected to advancing credit can be included in the statutory concept of interest.

There are exemptions for certain business and commercial loans where the borrower is not a natural person, including particular loans above $10,000, but those rules should be reviewed carefully rather than assuming every corporate loan is exempt.

High-rate private lending should therefore be reviewed before the documents are signed.

Do Not Ignore Corporate Authorization

Where the borrower is a corporation, the lender should confirm that the corporation has properly authorized the borrowing and any security being granted.

Depending on the company’s structure, this can involve director resolutions, signing authority and review of the articles, by-laws, shareholder agreement and existing financing arrangements.

If the proposed collateral is material to the company or the financing is unusual, additional corporate approvals may need to be considered.

What if Several Shareholders Own the Borrower?

This is especially important if the lender expects personal guarantees or security from the principals.

One shareholder may not necessarily have authority to pledge another shareholder’s property or cause the company to enter into a transaction contrary to a unanimous shareholder agreement.

Before relying on the security package, the lender should understand who controls the corporation and what approvals are necessary.

Due Diligence Matters Before Funding

Private lenders sometimes perform less diligence than a bank because the borrower is a friend, family member or business acquaintance.

That is exactly when problems can arise.

Before a substantial advance, I would want to understand what the borrower owns, existing debt, registered security, guarantees already given, pending disputes, ability to service the loan and whether the collateral actually belongs to the borrower.

A lender should be particularly cautious where the loan is being used to solve an urgent cash-flow crisis. Urgency can be a sign that other creditors already exist.

The Borrower’s Financial Statements Can Matter More Than the Note

A beautifully drafted note does not tell the lender whether the borrower can repay it.

For a material commercial loan, the lender may want current financial statements, accounts receivable information, existing loan statements, tax information or other evidence of financial condition.

The legal documents allocate risk. They do not replace financial due diligence.

Consider Ongoing Reporting Covenants

Where the loan remains outstanding for several years, the lender may want periodic financial information rather than discovering deterioration only after payments stop.

The loan agreement may therefore require delivery of annual financial statements, notice of significant litigation, notice of additional borrowing or confirmation that taxes and insurance remain current.

Whether those covenants are appropriate depends on the size and nature of the loan.

Do You Need Independent Legal Advice?

Independent legal advice can be particularly useful where a spouse, family member or business principal is giving a personal guarantee or pledging personally owned assets for another person’s debt.

It may also help reduce later arguments that the guarantor did not understand the nature of the obligation.

Whether independent advice is required or advisable depends on the transaction and circumstances.

What We Have Been Working On in 2026

Our 2026 transactional work has included several examples where a promissory note formed only one part of the overall legal structure.

In one significant cross-border business acquisition, part of the purchase price was being financed through a six-figure vendor take-back seller note.

The note had to work together with the share purchase agreement and senior acquisition financing. The transaction therefore involved issues such as subordination to the senior lender, events of default, restrictions on assignment, the buyer’s ability to assert set-off or withholding rights for legitimate post-closing claims and how the seller note would interact with the rest of the closing documents.

That is very different from simply writing, “Buyer promises to pay Seller $X.”

In another corporate matter, shareholder advances were specifically required to be documented through promissory notes while also being backed by general security agreements and PPSA registrations. The structure also addressed how the shareholder lenders would rank relative to one another.

Those matters illustrate the central point of this article: a promissory note can document the debt, but the surrounding security and transaction documents often determine how protected the lender actually is.

The examples above have been anonymized and certain details have been generalized to protect client confidentiality.

When Might a Promissory Note Alone Be Reasonable?

Not every loan requires a sophisticated financing package.

A simple unsecured promissory note may be reasonable where the amount is modest, the borrower is financially strong, the lender knowingly accepts unsecured-creditor status, there are no complicated repayment conditions and the parties want a straightforward debt instrument.

The important word is knowingly. The lender should not believe they are secured when they are not.

When Would I Consider Additional Protection?

Additional documentation becomes more important as the amount increases, the borrower becomes more leveraged, the loan term becomes longer, repayment depends on a risky business, existing secured lenders are involved or the lender is relying on specific assets for repayment.

The same is true where the borrower is a thinly capitalized corporation. A lender advancing significant money to a corporation with no guarantee and no security should understand that the corporation itself may be the lender’s only source of repayment.

Private Lending Checklist

• Confirm the exact legal identity of the borrower and lender.
• Determine whether the borrower is an individual or corporation.
• Confirm the principal amount and funding date.
• Document the annual interest rate and payment schedule.
• Determine whether the note is payable on demand or at maturity.
• Define events of default and any cure periods.
• Decide whether the outstanding balance accelerates on default.
• Determine whether a broader loan agreement is needed.
• Consider whether a personal or corporate guarantee is appropriate.
• Identify the collateral that is intended to secure the loan.
• Conduct PPSA searches where business assets are involved.
• Review existing secured creditors and priority.
• Prepare an appropriate security agreement where required.
• Complete PPSA registration where appropriate.
• Review title and existing mortgages if real estate is involved.
• Review corporate and shareholder documents if shares are being pledged.
• Confirm corporate authorization for the borrowing and security.
• Review existing lender restrictions and consent requirements.
• Consider whether an intercreditor or subordination agreement is required.
• Confirm how legal costs and enforcement expenses are dealt with.
• Review the interest structure under the Interest Act and Criminal Code.
• Assess the borrower’s actual ability to repay.
• Keep evidence of the actual transfer of loan funds.
• Document later amendments rather than relying on verbal changes.

What if You Already Lent the Money With Only a Promissory Note?

The absence of security does not mean the debt is automatically unenforceable.

The first step is usually to review the note, payment history and communications to determine what is due and whether a default has occurred.

It may then be appropriate to send a formal demand, discuss repayment or settlement, or consider other enforcement options.

You can read our guide on sending or responding to a demand letter in Ontario.

Where the borrower is still cooperative and has not yet defaulted, it may sometimes be possible to negotiate additional security or a guarantee. That needs to be approached carefully, particularly if the borrower is already experiencing financial difficulty or has other creditors.

Do Not Wait Until After Default to Think About Security

The best time to structure a loan is generally before the money leaves the lender’s account.

Once the funds have been advanced, the lender has substantially less leverage. The borrower may refuse to grant security, another lender may register first or the borrower’s financial position may already be deteriorating.

Proper documentation at the beginning is usually much easier than attempting to repair an unsecured loan after trouble begins.

How Falcon Law PC Can Help

Falcon Law PC assists entrepreneurs, shareholders, businesses and private parties with commercial loan documentation and related corporate transactions.

Depending on the matter, we can assist with promissory notes, loan agreements, personal guarantees, general security agreements, PPSA registrations, shareholder loans, vendor take-back financing, corporate resolutions, share pledges and related transaction documents.

You can learn more about our legal services for entrepreneurs and business owners.

If you already have a proposed loan agreement, promissory note, guarantee or security document that you want reviewed before signing, you can also QuickStart a contract review.

The central question is not simply whether the borrower has signed a promise to pay. It is whether the lending structure gives the lender an appropriate level of protection for the amount and risk involved.

This article is intended for general informational purposes only and does not constitute legal, tax, insolvency, financial or investment advice. The appropriate lending and security structure depends on the parties, the collateral, existing creditors, the loan amount and the particular transaction.