While there are times when businesses barter and trade services for goods or vice versa, most business is conducted on the exchange of money. Everyday, people and companies issue orders to pay and promises to pay. They sound alike, and are both considered negotiable instruments, but they differ.
What Is a Promise to Pay?
Also called a promissory note, the most common example of a promise to pay is a utilities agreement. But loaning money to a friend or family can also be considered a promise to pay, since the stipulation in your loaning the money is that the person has promised to repay it. While oral promises to pay can technically be enforced by courts, it’s always better to issue a promissory note in writing to protect yourself. After all, your car loan, mortgage and every other loan or payment plan you’ve agreed to is in writing for good reason.
Promissory notes can also be referred to as just “notes,” and typically, only two parties are involved. There’s the maker, who is the person borrowing the money or promising to pay money in exchange for a product, service or ongoing service. Two, there’s the payee, who is the person, company or institution to whom money is promised to be paid. For example, if you sign a promise to pay agreement with a Verizon sales kiosk, you are the maker of the agreement or note, and the kiosk company is the payee that will receive payments you’ve promised to make at designated intervals.
Meeting the terms of agreement with most promissory notes should be clearly explained in the note. If you go to Verizon.com to pay online and you pay that month’s bill in full, you’ve met the terms of your promise to pay – for that month, anyhow.
What makes a promissory note different from an actual loan contract is that a loan contract is more regimented in details. For instance, your car loan payment is for $469 monthly. It doesn’t fluctuate. On the other hand, perhaps your Verizon contract includes a monthly installment of $229 for your new iPhone, but while the base plan is consistent, calling totals and add-ons for your bill can fluctuate monthly. So, your agreement is that you promise to pay the monthly charges as indicated by a bill issued on or after a specific date monthly.
What is an Order to Pay?
Also called a “draft,” this negotiable instrument is an order to pay money as opposed to a promise to pay. These can also be referred to as an “order paper” or “order instrument.” Examples of orders can be a check or a bill of exchange. Have you ever noticed that a personal check states “Pay to the order of” before the payee line? If you’re written in as the payee, once that check is presented to the bank, the bank has been ordered to pay you.
There are typically three parties involved in an order to pay. There’s the payee, the person to whom the funds are to be paid. Then there’s the drawer, that is, the person who fills out or at least signs the check. Finally, there’s the financial institution that will issue the funds to the drawee of the check, the person who endorses and deposits or cashes it.
An order to pay, such as a check, must be endorsed, or signed, to receive funds. But once a check has been endorsed by the payee, it becomes a “bearer instrument” rather than an order instrument. This means, anyone who bears or holds the check is now legally able to receive the funds. Today, most checks no longer need endorsing if they are deposited through an ATM. Otherwise, they can be signed at the last moment when depositing or cashing through a bank employee. To stay safe, never endorse order instruments until it’s time to get paid.