Interest bearing note definition

What is an Interest Bearing Note?

An interest bearing note represents funds loaned by a lender to a borrower, on which interest is accrued in accordance with the terms of the agreement.

Types of Interest Bearing Notes

There are many applications for the interesting bearing note concept. Here are several options:

  • Receivable conversion. An account receivable can be converted into a note, under which a customer is instead classified as a borrower, and pays interest on what had formerly been considered an account receivable.

  • Mortgage. A mortgage is an interest bearing note, a homeowner agrees to a lengthy series of payments that, depending on the terms, may include both interest and principal repayment components.

  • Business loan. A long-term loan to a company is an interest-bearing note, which is used to support its funding requirements over a multi-year period.

The terms of an interest bearing note may require the borrower to pay back the entire amount of the principal at the end of the term loan, or in a series of payments over the life of the note.

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Example of an Interest Bearing Note

Nova Corporation sells a deep-field scanning telescope to Aphelion Corporation, and invoices it $250,000 on 30-day payment terms. Aphelion does not pay on time, so after extensive discussions, the two parties agree to convert the receivable into an interest bearing note. Under the terms of this arrangement, Aphelion promises to pay Nova $5,000 per month, plus 7% interest, until the debt has been cleared.