A business card is similar to a real-estate note, except that the collateral is primarily a business and not real estate. So tell me, again, what is a “business note?” Let’s take Shelly Seller selling her printing business to Bobby Buyer. Shelly rents the property and believes that the business and all its assets are worth $300,000. Bobby accepts the price, but he doesn’t have $300,000. He also cannot borrow money from his bank. This means that he has no option to purchase the print shop. Shelly believes Bobby is a reliable payer who can manage the business. She proposes an owner financing arrangement where she sells to Bobby the following numbers:
Sales price: $300,000
Minimum down payment of $100,000
Original note amount: $200,000
Terms: Terms for 15 years, 7% rate of interest, monthly payments $1797.60
An attorney will normally prepare a list of documents, one listing the assets being sold and one listing the terms for payment. This is also known as the business note, the promissory notice, or simply the note.
As is so often the case in this scenario, owner financing saved the seller and buyer the money they needed. It is usually faster and cheaper to create a note than have the payer obtain a bank loan.
Bobby may decide to make Shelly more money once she has started making payments. She may be starting a business, need to pay off some debts, or simply want to go on a long vacation. Shelly might contact a broker or investor in business notes like ELM Capital to sell the note. Shelly will need to ensure that her transaction meets these minimum requirements.
1. Bobby paid at least 25% downpayment
2. The business is viable long-term and profitable right now
3. Payer is a good credit holder and can manage this type of business.
4. Bobby has received at least three monthly payments
5. Shelly’s lien against the company is superior to any other large liens.
6. There is no large balloon payment required at the conclusion of the term
Because of the inherent risk, business notes are more difficult than real estate notes to sell. The investor is not qualified or interested in the management of the business if the payer defaults. Many business notes I receive are missing one or more of these elements. This usually means we can’t buy the note. It is therefore important to review the list before you close the transaction.