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Accounts Payable vs. Notes Payable: What Your Business Should Know

In this article, we explain accounts payable vs. notes payable. How is your company handling its accounts payable workflow? Check out our “The Ultimate Accounts Payable Survival Guide.”

Accounts payable and notes payable are major expense items for any business. To distinguish accounts payable vs. notes payable, here is an overview. 

Comparison: Accounts Payable vs Notes Payable

Accounts payable involves recording and processing supplier invoices with trade credit terms and paying the suppliers of goods and services, whereas notes payable are written contracts that typically serve the purpose of obtaining financing and paying debts through financial institutions and credit companies. 

Accounts PayableNotes Payable
Liability on balance sheetYes – Short termYes – Usually long term  with the current portion due within 12 months as a short-term liability on balance sheet
Principal plus interestNoYes
Promissory noteNoYes
Payment termsYesYes
Requires supplier onboardingYesNo
Purchase order processingOftenNo
Invoice processingYesNo
Part of working capital managementYesNo
Potentially large staff requirementsYesNo

What is Accounts Payable?

Accounts payable refer to short-term debt obligations to suppliers and creditors that support normal business operations. They appear on the balance sheet as current liabilities, and typically have payment terms associated with them such as 30, 60 or 90 days. 

Accounts payable are much less formal agreements to pay and are generated as part of the operating cycle of the business. This means there is always an accounts payable balance as long as the business is operating. While there is no interest payment associated with accounts payable, some suppliers may assess late payment penalties if payments are not made by the invoice due date.

What is Notes Payable?

Notes payable refer to debt or other borrowing on the balance sheet. Generally, they are of a longer-term nature, greater than 12 months. Like accounts payable, they are a liability on the balance sheet. The portion of notes payable due within 12 months is a current liability. Unlike accounts payable, notes payable have two components: principal and interest. They can be considered formal loans where you need to manage not only the principal but also the interest payment.

A common form of notes payable is a promissory note, which is similar to a loan. This is a legally binding contract to unconditionally repay a specified amount within a defined time frame. It differs from a loan contract in that payments are usually paid monthly rather than in installments. In addition, notes payable do not contain clauses for recourse actions in the event of default. In that sense, you could consider notes payable as unsecured loans.

Notes payable are also independent of the business cycle. They would not automatically change with the volume of business. As they also have an interest expense associated with them, they are not cost-free.  

Let’s look at an example

A SaaS company borrows $25,000 from a bank to put towards company growth and scale. The company would write a credit for $25,000 to its notes payable account, and a debit for the same amount to its cash account. This SaaS company plans to repay the bank within one year, so it considers the debt a current liability on the balance sheet. (If they planned to repay their notes payable in a period longer than one year, it would be listed as a long term liability on the balance sheet, except for any payments due in the next 12 months, which are classified as a short-term liability called current portion of notes payable.)

The Role of Accounts Payable 

The accounts payable team is responsible for paying the expenses that a company incurs to operate its business. For a small company, there may be only one or two people involved in this function. As a company grows, however, the need for resources expands with it. At some point, that larger team will become an accounts payable department. 

Early on, the account payable team may also be responsible for managing accounts receivable, which manages the income that a company generates from the sales of goods and services. Continued growth will lead to the segmentation of accounts payable and accounts receivable, with dedicated resources assigned to each accounting specialty.

In larger organizations, the accounts payable function will require the further refinement of roles to support a broad set of business processes. These can include supplier onboarding and management, purchase order-invoice management (including matching invoices to purchase orders, goods receipt, and related documents), payments, and even working capital management. We’ll discuss these business processes in more detail later in this article.

The Role of Notes Payable 

When assessing accounts payable vs. notes payable, it quickly becomes clear that notes payable are much simpler to manage. That’s because notes payable have many fewer “moving parts.”

As explained earlier, notes payable involve the payment of money owed to a financial institution or other creditors. They involve the payment of principal and interest and are generally longer-term payment commitments (greater than one year).

Components of notes payable typically include:

  • An amount owned
  • Interest rate on the loan
  • Interest payment along with principal
  • Loan maturity date
  • Name of payer and payee
  • Note’s issuer (signed)
  • Date of signature

Notes payable transactions are typically associated with larger payments. They could include the purchase of a building or major piece of equipment, to obtain a fleet of trucks to service customers, to fund the development of a new product line, or to cover an unexpected expense. 

How Both Accounts Payable and Notes Payable Can Help Improve Business Operations

Keeping accurate logs of expenses and owed payments of all kinds is important to any business’s spend management process, as well as their specific spend management strategy. A smooth accounts payable process helps organizations keep track of invoices, avoid late payments and fees, and fulfill their short term obligations. 

Notes payable on the other hand is crucial to business health as well, but for slightly different reasons. Accurately booking notes payable on the company’s general ledger or balance sheet helps finance and accounting teams manage spend by not only keeping track of longer term payment obligations, but ensuring timely payments that allow you to avoid interest payments, late fees, and an overall mess. 

Paying back these loans to banks or other financial institutions also helps build good credit, and notes payable overall allow businesses more time and room for strategic future planning.

How can your business improve its accounts payable processes? 

Description: Download our white paper, “The Holy Grail of Accounts Payable” to learn how your business can efficiently automate payables and global payments. 

Use AP automation software with self-service supplier onboarding, electronic invoice processing, guided approvals, supplier payments tracking, and validation processes for reduced errors and fraud risk and simpler global regulatory and tax compliance.

The Complexity of Accounts Payable 

As noted earlier, when comparing accounts payable vs. notes payable, the complexity of tasks is a major difference. For accounts payable, that complexity will grow with the volume of business. As revenues grow, so will the need for additional resources to pay suppliers and creditors in an accurate and timely manner. At some point, an organization will require the structure of an accounts payable department.

Here is an overview of potential tasks for an accounts payable team.

Supplier management

This involves the collection of information about suppliers, assessing their creditworthiness and financial strength, monitoring their performance, ensuring tax compliance, and performing ongoing compliance checks against watch lists such as the Office of Foreign Assets Control (OFAC), sanctions, and litigations. For preferred suppliers in certain categories of business spend, supplier management could extend to catalogs that employees order from, to make sure that all products and pricing are current and accurate.

In some organizations, supplier management is the responsibility of procurement; in others, it is the responsibility of accounts payable. Regardless of which team oversees the process, another essential task is the maintenance of the master vendor file. Procurement and AP teams must work closely together to ensure that orders, and payments, go to the right suppliers, sent to their current bank account or business location. A reliable master vendor file is essential to making this happen.

Invoice processing (receipt and matching)

Before you make a business payment, you must accurately process an invoice. That’s a key task in accounts payable, and one that is often easier said than done. 

Invoice processing can be among the most costly and challenging business processes to manage, especially when it involves large volumes of paper invoices. For an accounts payable staff overwhelmed with the volume of paper, it can take many days to approve an invoice for payment. 

Invoice approval can extend to weeks when paper invoices are mailed to a remote location, then forwarded to accounts payable for processing. In addition to delaying invoice receipt, this increases the likelihood of losing an invoice or processing a duplicate. That’s a main reason why electronic invoice processing has grown in popularity. Delivering an invoice electronically instead of via paper mail eliminates these delays and extra steps, and minimizes lost invoices and duplicate payments.

The power of matching

Invoice processing involves much more than simply receiving an invoice. You must be sure that the invoice is authentic, the price is right, and that the goods or services have been delivered.

That’s where automated document matching becomes a valuable tool for account payable. This often starts with a purchase order, a purchasing best practice where authentication occurs on the front end before an order is sent, not after the fact of a purchase. Adding this requirement for purchasing eliminates the burden on accounts payable to validate an invoice. In a two-way match, the invoice is linked to a purchase order, automatically matched, and immediately approved for payment. 

A three-way match occurs when a goods receipt is involved and linked to the purchase order and invoice. With this added process step, you know that the order was accurate and that the goods were received.

Another invoice processing method for recurring orders can involve ordering off a contract. The matching is similar to a purchase order or PO match. Instead of matching to the PO, the match is to the contract, and the amount of the contract is automatically debited to keep an accurate account of the budget.

Taken together, the power of matching from electronic invoicing helps accounts payable turn invoices around fast enough to meet payment terms, such as 30 days to pay upon receipt of invoice. As monthly invoice volumes scale — from hundreds to thousands or thousands to tens of thousands — timely processing with electronic invoicing can continue with minimal or no addition to accounts payable staff.

Payment processing

Once an invoice is approved, the next step in the accounts payable process is payment. Here, too, there are complexities, especially when transactions are conducted on a global scale. You may have to juggle payments in different currencies and multiple payment methods such as US and global ACH (Automated Clearing House), PayPal, wires, paper checks, or prepaid cards. 

Just as more organizations are moving off paper invoices, there is a move away from paper checks and wire payments to protect against fraud, lower costs, and streamline the payment process. Automated solutions for global payments simplify the process for making payments to potentially thousands of suppliers while eliminating the need for accounts payable to enter data across multiple bank portals. 

Today, with an automated solution, anyone on the AP staff could easily schedule payments in different methods, countries, and currencies without jumping to different applications or platforms. Equally important, you can deliver valuable remittance information with these payments to simplify the reconciliation process for your trading partners.

Accounts payable is also responsible for managing employee reimbursements for travel expenses, petty cash, and other requests. Automated solutions can assist accounts payable to streamline and simplify the processing of these payments as well.

Working capital management

An often-overlooked aspect of accounts payable is the role it plays in managing working capital, through the ability to time payments. Many suppliers offer discounts to customers as an incentive to pay before the invoice due date. These discounts can bring annual returns on cash well above what can be earned on bank cash balances or other short-term investments.

For example, a 2/10 net 30 discount – where you would get a 2% discount to pay in ten days vs. the standard 30-day term – translates to a 36% annual return on that cash. Organizations with income statements that show healthy margins, sizeable cash balances, and little debt can find these returns one of their best investments for short-term cash. 

Conversely, organizations that have little control over their accounts payable process may not be capably managing their days payable outstanding or DPO. This metric is the average number of days a company takes to pay suppliers after invoice receipt. 

Companies with a high DPO, taking longer to pay their invoices, can use the extra cash on hand for early payment discounts or other short-term investments. Companies with a low DPO may be paying suppliers earlier than necessary, negatively impacting their free cash flow. This presents an opportunity to extend payment terms with their suppliers, and introduce an early payment discount program to support suppliers who would like to be paid sooner. 

Look to Automation to Further Streamline the P2P Process

AP automation software helps growing organizations get a handle on an often messy and stressful accounts payable process. Manually inputting data from each invoice leaves a lot of room for error, some that can be caught and corrected, and some that are far more difficult to go back and fix. Automation software eliminates the need for manually inputting invoices during the P2P process, increases data transparency, makes auditing easier, and even adds a layer of fraud protection.

Automation software can easily integrate with your ERP, making invoice routing simple, helping your team track expenses through expense management, including employee expenses, lower costs, and gain more operational control.


As you can see, assessing accounts payable vs. notes payable isn’t an apples-to-apples comparison. Accounts payable is much more complex, involving many linked tasks and related business documents to enable accurate and timely payments and help optimize working capital. Notes payable focus is the payment of loan principal and interest for large company purchases. Both are essential accounting functions that require careful monitoring to ensure financial health.

To learn more about AP automation software, download our eBook “The Ultimate Accounts Payable Survival Guide.”

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