Cash Flow NotesPosted on September 15th, 2010 William No comments
A cash flow note is a contract wherein the borrower promises to repay the lender; essentially, you are trading a lump sum payment now for the promise of a continuing stream of income later. There are a number of common types of cash flow notes, discussed below. Like any other asset, they can be bought and sold; some are fairly complicated, and all should be purchased only after completing due diligence.
Factoring allows a business owner to sell account receivables that are due within the next three months; the factor is the person or company purchasing the receivables. Once the business owner receives payment from his customers, he repays the factor with interest. Generally these are low-interest loans that also require a small fee.
Purchase order funding is a joint bet by the lender and borrower that a purchase order will be good; money is borrowed against the order, to be repaid when the customer completes the purchase.
With real estate cash flow notes, real property is used as security on the note, using a mortgage or trust deed. If the buyer defaults, the property can be sold to satisfy the debt.
Seller carry back notes are used to provide funding for purchasing a business; the business owner agrees to provide financing for the buyer, who might have trouble obtaining conventional financing. Generally the buyer puts down a 30% down payment and the seller carries a note for the rest, to be repaid over the next three to five years. These are a subset of business cash flow notes, in which money is borrowed using the business assets as security.
Structured settlements are used to compensate people who have been injured due to the negligence of an organization or another individual, and is secured using annuity payments. Many people opt to sell their annuity for an immediate cash payment, rather than waiting to collect over time.
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