Sell Trade Notes for Cash Faster
In about 85 percent of all business sales, sellers accept a cash down payment and a promissory note to pay off the balance in installments. The note is personally guaranteed by the buyer, and is insured by the company and its assets in the event of buyer default. Providing owner financing allows sellers to cater to a broader pool of potential buyers.
However, many sellers don’t want to be in the lending business and would prefer not to have business notes. The good news is that they don’t have to. If you created a business note to get rid of your business, you can sell the note to someone else. In this way, you can get instant cash from the business, instead of waiting for regular payments in the future. You can use the cash for a variety of purposes, including: capitalizing on other investment opportunities, paying down debt, financing college tuition, and making major purchases.
How the sale of commercial notes works
Commercial notes are bought at a discount, like all notes sold on the secondary market, to make them attractive to potential buyers. Without a discount, there is no incentive for investors to take the risk of waiting three to five years or even longer to get their money back. Historically, more than 90 percent of new business owners fail within the first five years. Therefore, there is considerable risk associated with the purchase of any commercial note.
You may receive less than the full balance of your note when you sell it. However, the total cash you receive from the down payment and the sale of the note will generally be about the same as what you would have received from a cash sale of your business. This is because cash buyers can insist on a much lower asking price.
The amount of money that you will actually receive for your promissory note depends on several factors. But as a general rule of thumb, for a full purchase, you can expect to be paid 50 to 80 percent of the note balance. More specifically, the amount of cash your note can be sold for will be determined by three general components: the current economic environment, the terms of the note (payment amount, interest rate, repayment duration, etc.), and the degree risky. or probability that the holder of the note will lose his money.
Criteria for Purchase Notes
Certain guidelines must be set to buy a commercial note. Naturally, first position links are eligible. Here are some other items investors like to see:
o The business is in a profitable position, with evidence of operating cash flow.
o The buyer has good credit, which generally means a FICO score of at least 625.
o The buyer deposited at least 30 percent of the purchase price in cash, which means that he is truly committed and capable of weathering cycles.
o The main owners have made a personal guarantee on the note.
o The note has been “seasoned,” meaning the buyer has made payments for at least two months. This shows that the buyer is happy with the purchase.
o The promissory note must have a minimum face value of $15,000.00.
Sale Structuring
There are several ways to structure the sale of your commercial note. You can sell the entire note, or just part of it. The most common way to sell a note is through a “partial purchase,” which involves selling only a certain amount of the remaining payments on your note.
Ticket buyers can purchase any amount of the remaining payments in a variety of ways. For example, let’s say you have a promissory note with a balance of $80,000 payable in 240 monthly installments. If you need only $20,000 now, for whatever reason, the note buyer would calculate how many payments would need to be purchased to provide you with that specific amount of cash. Exactly which payments would be purchased would depend on your personal financial situation. Could you sell:
o A certain number of the initial payments of the promissory note. (The note buyer could buy the first 60 payments and then you would receive the final 180 payments.)
o A certain number of final payments on the promissory note. (The buyer could buy the final 180 payments and transfer the first 60 payments to you.)
o A certain percentage of each of the remaining 240 payments on the note. Perhaps 50 percent of each of the 240 installments could be purchased. (You would receive half of each of the 240 payments.)
So which option in the example above would be best for you? It would depend on your current financial needs and future concerns. All of the alternatives would provide you with an immediate cash payment of $20,000. However, you can choose the first option if you need $20,000 today and require future monthly cash flow five years from now. You can choose the second scenario if you need $20,000 now and a monthly payment for the next five years until you start receiving your retirement benefits. Or you can choose the third option if you need $20,000 today and also want/need the 50 percent monthly payment for the next 20 years.
The purchase process
To purchase a commercial note, purchasers must take an assignment of the security instrument (UCC-1 Financing Statement) and receive an endorsement of the note). But before they get to that stage, they will do the necessary due diligence and closely examine all aspects of your business sale transaction. Note buyers will handle all the paperwork for the purchase, from verifying all aspects of the deal to preparing/having filed all the documents needed to make the change.
The note purchase process takes an average of four weeks to complete. If the sale of your business and the creation of the note were “typical”, then you should have your money within four weeks.