BACKGROUND AND FUNDAMENTALS
A business note is generated every time an individual sells a business and chooses to carry the financing and collect regular payments from the new business owner(s). There are literally millions of dollars in business notes in the United States.
People are interested in selling business notes for several reasons. Usually, the prospective seller has decided that he would rather receive the lump sum value of the business, rather than monthly payments. Often that”s because he wants to invest in a new business. Other times, the prospective seller has an incentive such as an expensive wedding bill, college tuition or a retirement trip.
Business notes are very similar to private mortgages or trust deeds. The main difference is that business notes are not secured by real estate. There is no real estate involved. (If a business is sold and it includes the real estate then a note is created which encumbers both the business and the real estate. Often times two notes are created, one for the business and one for the real estate).
SECURITY FOR BUSINESS NOTES
A Chattel Mortgage or Security Agreement These agreements list every piece of collateral that secures the business note. When working in a state which accepts the UCC terms, a security agreement is used; in other states they will find a chattel mortgage. “Chattel” refers to the chairs, tables, etc. These items are sometimes referred to as “F, F, and E” – furniture, fixtures, and equipment. The agreement will list everything that is included in the sale of the business. This is important because until the time that the loan is repaid, the buyer of the business can not sell or do anything with that security until he repays the debt.
A UCC-1
A UCC-1 shows that the seller has sold his business and has carried the financing. The UCC-1 filing is evidence of the seller”s position as a secured party.
TRANSACTION DETAILS
In order to obtain an accurate quote, it is necessary to have up to date information about the note. All quotes will be subject to due diligence by the note purchaser.
The first critical item of due diligence will be verifying the credit worthiness of the payer (mortgagor). The lower the credit score, likely the lower the offer.
The second critical item is a drive-by appraisal or valuation with comparisons of similar houses and neighborhoods. The note purchaser wants to be sure there is adequate value.
One of the key things many people do not realize is they do not have to sell the whole note. The note holder will always receive more money over time if they only sell part of the note. We recommend that a note holder determine the amount of cash needed. A quote can be obtained telling how many payments will be required in order for the note holder to receive the necessary cash.
There are many options available when you have a contract or note and are trying to raise a lump sum of cash: 1) sell the entire balance of the contract; 2) sell a specified number of payments; 3) sell part of each payment, while continuing to receive the balance.
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