A Business Note
A Commercial Lease
Invoices and Accounts Receivables (Factoring)
A business note is generated anytime a business is sold and the seller chooses to carry the financing (holding paper) and collects regular payments from the new owner. If you are in this position, you may want to sell your note for many reasons. Usually when we sell a business, our first choice is to get cash out of the sale. Often that is not possible because people may not have that much cash available to them or a bank has been unwilling to cooperate in the transaction. So we end up carrying the note ourselves. Sometimes this makes good tax sense and it is to our advantage to just keep collecting the payments. Other times we would just as soon get out from under the hassle or we need to get a lump sum of money to get involved in another business venture or a different investment. In these cases the monthly payments are a nuisance and we could sell the note getting the lump sum of cash. This is very similar to selling a Real Estate note, except that often businesses aren’t necessarily tied to Real Estate. In this case the Note sold is not a Mortgage note, but a Chattel Mortgage, and instead of a Mortgage Deed there would be a UCC-1 showing that the seller has sold his business and has carried the financing.
A transaction may go like this. Larry sold his business to Bob for $100,000 at 10% for 15 years. He is receiving monthly payments of $1,074.61. Larry wants to invest in another business but doesn’t have the cash on hand to invest. Larry contacts a Cash Flow Specialist, arranges to sell his note for a lump sum, and uses that money to invest in his new business. The net effect of this transition is that Larry has sold his first business for cash and invested in a second business. The transaction happened quickly and cleanly because there were no banks involved with all of their regulations. The original agreement with Bob remains intact. Bob makes the same payments to the Cash Flow Specialist or its Funding Source instead of Larry, but interest rates and terms remain the same.
A Commercial Lease is another form of a Business-based Income Stream. If you are a Landlord of commercial Real Estate, you have a lease established with your clients. These leases range in length from several months to several years. Did you know that that lease agreement could be sold for a lump sum of cash right now? It might work like this.
Sam owns a strip mall and leases out 10 units averaging about $1,000 a month. Most leases are on a 3-5 year term. Sam’s daughter is getting married and Sam needs to raise about $7,000 in a hurry to help with wedding expenses. (Cheap wedding I hear or else he has money other places. I might suggest eloping, but that is another website.) Sam contacts a Cash Flow Specialist and sells one year of lease payments from one unit to a Funding Source. He has enough money for the wedding now and some money left over for him and his wife to take a vacation after the wedding is over. The kid gets the honeymoon; Sam just needs to calm his nerves. A Cash Flow Specialist can get the job done quickly and efficiently. Of course Sam could have sold fewer months, more months or the lease agreements on more of his units whatever his need. Either way a Cash Flow Specialist can probably help Sam get just what he needs.
Invoices and Accounts Receivables are other Business-based Income Streams that can easily be sold. These fall in a slightly different category, but work pretty much the same way. See FAQ’s on Factoring for more information. If Bob has a business that is growing rapidly he may be having cash flow problems. Bob just received an order for $100,000 worth of widgets from AT&T. He sells the widgets to AT&T and an Accounts Receivable is created. AT&T will pay in 30 days, but Bob just received an order for $100,000 worth of Widgets from Sprint. Bob has a problem. Until AT&T pays the Accounts Receivable (A/R) Bob can’t produce the widgets to supply Sprints order. If Sprint needs the Widgets right now, Bob may lose the account. Bob applies to the bank for a line of credit, but because he has been caught with outstanding A/R’s in the past he has been late on a few payments, and he doesn’t fit the criteria for the Bank’s line of credit. What can Bob do?
Bob contacts his Cash Flow Specialist and is put in touch with a specialty Funding Source called a Factor. The Factor doesn’t care about Bob’s late payments. He can buy the A/R from AT&T and give Bob money right now to fill the order for Sprint. The reason the Factor doesn’t care about Bob’s credit is that all he has to worry about is AT&T’s credit. (I understand they pay their bills very well.) The Factor advances Bob 75% of the A/R, $75,000, and Bob can produce the widgets for Sprint. When he sells to Sprint he also gets a $100,000 A/R which he can factor if he wants. MCI is probably needing Bob’s widgets too. In fact Bob can turn his A/R’s over as often in a month as he can produce and sell widgets. (Try getting 3-4 times $75,000 from a bank without making a payment.) When the A/R’s are funded the Factor takes his fees, starting as low as 2-3%, and returns the rest of the reserve to Bob. Because of Factoring Bob can do 300% more business than he used to do.