CASCADE FUNDING, INC.
What is a Business Note?
Why would I want to sell my future payments?
Why is there a discount?
How much cash can I get today for my note?
Can I sell just part of my note if I don't need all of my cash today?
How long will it take before I have my money?
What is the process i.e., how does it all work?
A business note is a document (or documents) secured by a business and, often, personal property such as inventory, furniture, and so on, that obligates one individual or company to make periodic payments to another individual or company. These receivables are created when a business, such as an accounting firm, is sold. There is no real estate involved in these transactions. The purchaser gives the seller a cash down payment and the balance is paid to the seller in periodic, usually monthly, installments. Therefore, payments are made from the business purchaser (payor) to the business seller (payee). In these transactions, the business seller is simply extending credit to the purchaser for that part of the purchase price not paid at closing. It is clear then that these transactions are not loans. The entire transaction involves no third party bank or other lender and no money is exchanged for the unpaid purchase price. Historically this was called seller-financing or owner-financing but now it is preferred to refer to these transactions as "installment sales" to further distinguish them from loans. The payments a business seller will receive from these notes are an asset, and like any other asset, can be sold for a lump sum of cash.
There are perhaps as many reasons people sell their notes as there are ways to spend money. We always ask note sellers why they wish to sell their note. The most frequent responses we get are: 1. To eliminate the risk and responsibility in holding the note; 2. To achieve liquidity; 3. To take advantage of other investment opportunities; 4. To pay off debts; and, 5. To make specific purchases. Often people never wanted to carry back a note in the first place but had to in order to sell their business. Other situations, such as notes provided as equity settlements in divorce cases, inherited notes, to name just two, often result in the current note holder owning a note they never wanted. Often these people are happy to receive the current value of their note in cash and move on with their lives.
Whenever future payments are sold for cash today the current balance is always sold at a discount. There are two reasons for this: 1. The amount of the loan is paid back to the payee over time--and time erodes the value of money; and, 2. The stated interest rate on seller-financed Notes is not high enough to induce investors to purchase these loans. Therefore, to increase the yield investors get on the investment, you must sell the cash flow at a rate of return greater than the note rate. You do that by selling the note at a discount from its current principal balance. Business notes are sold at a deeper discount than real estate receivables since the security, a business operation and personal property, does not provide the same degree of safety that real estate does.
The amount of cash a note can be sold for depends on three general components: 1. The current economic environment; 2. The terms of the note (payment amount, interest rate, length of payback, etc.); and, 3. The probability that the note holder will lose his/her money (degree of risk).
The current economic environment influences the yield or rate of return an investor requires when purchasing a note. In general, the better the economy, the lower the cost of funds for the investor, and, therefore, the lower the yield we require on the investment. Currently (March 2011), we are in a fairly good economic environment -- as far as interest rates are concerned. Today's low interest rates means more cash for note sellers than ever before--and perhaps more than will ever be paid in the future.
We must examine the terms of the note (#2 above) and the degree of risk (#3 above) individually for each note offered for our purchase. Many people would like us to quote a fixed percentage of the remaining balance on their note. This is not possible due to the great variability these two items possess. However, in most cases, we can evaluate all three of the above components and make a cash offer for your note while still on the initial telephone conversation.
Yes, in fact this is very common. It is referred to as a "partial purchase" and involves selling only a certain number of the remaining payments on your note. At Cascade Funding, Inc., we can purchase any number of the remaining payments in almost any manner you can think of. For example, let's say you have a note with a balance of $80,000 payable in 240 monthly installments. If you needed just $20,000 now for whatever reason, we would calculate how many payments we would need to purchase to provide you with that specific amount of cash. Precisely which payments we purchase depends on your personal financial situation. Here's a few of the options we could look at for you:
We could buy (Numbers are for illustration only):
Remember, all of the above options will provide you with the $20,000 needed today. The type of partial purchase chosen will depend entirely on your unique financial situation. In other words, you may choose the first option if you need $20,000 today and want or need to have a future monthly cash flow beginning in 5 years. You might choose the second option if you need $20,000 today and you need a monthly payment for the next 5 years until, say, your retirement benefits begin. And you might choose the last option if you need $20,000 today and also want or need the monthly 50% payment for the next 20 years.
There are many other ways we can structure the partial purchase for you. Our goal is to get you the specific amount of cash you need NOW while also addressing your financial concerns of the future. A real estate note is a remarkable asset when you can intelligently sell your payments to an investor like Cascade Funding, Inc. who has the expertise to offer such a rich variety of possibilities.
We have purchased notes in as little as one day; and it has taken over a year to purchase others. On average, it takes approximately four weeks. If the sale of your business and the creation of the note was straight forward then you should have your money within four weeks.
To purchase a business note we need to take an assignment of the security instrument (UCC-1 Financing Statement) and receive an endorsement of the promissory note. These are the final steps in selling your note however. Before we get to this point we have to do our due diligence. That is, we need to closely examine all aspects of the transaction. You need not be concerned with not knowing what to do; however, since we do all of the work-- from verifying all aspects of the deal to preparing and having recorded all of the necessary documents to make the change.