Business Notes
Business note description
A business note is normally a promissory note secured by a business. This would include any inventory and equipment that belongs to the business, but does not include real estate property. This note obligates the individual that bought the business to make the agreed upon payments for a specified amount of time. The buyer would normally give the seller a cash down payment, the more the better, and then make payments to the seller in regularly structured payments. These payments are most often made on a monthly basis, but they can also be quarterly, annual and/or balloon type payments. Assuming you have a properly recorded business note, if the payer defaults on his obligation to repay this business note the seller has the business plus the assets to go after in order to recoup their loss. This is of course assuming you have a properly recorded business note, UCC-1 Financing Statement, and other documents needed.
What is involved in the sale of a business note?
When you sell a business note the investor buying your note needs to get an assignment of the security instrument, UCC-1 Financing Statement, and then take an endorsement of the promissory note. This finalizes the note sale and transfers ownership to the investor while the seller gets the lump sum of cash he is owned. As your business note broker I will work closely with you and the investor in the collection of the necessary documents needed to finalize this note sale. I will get you the best prices for your promissory note because I have relationships with some of the top buyers in the country. It usually takes 3-6 weeks to close, depending on how fast documents can be gathered and the due diligence period runs it course.
- The following is a list of the some of the documents needed to close a business note.
- Signed note of Personal Guarantee (if corporately signed note).
- Sales Purchase Agreement or Asset Purchase Agreement.
- Signed Security Agreement or Chattel Mortgage.
- UCC-1 Financing Statement recorded at State and County.
- Settlement/Closing Statement and escrow instructions.
- Covenant Not to Compete (unless already shown in Purchase Agreement).
- Operating Licenses such as Liquor License, etc.
- Franchise Agreement, if applicable.
With a business note the investor not only looks at the payer’s credit rating and his ability to pay, but he also takes into consideration the business and its ability to be profitable. This is because he will not have a property, like a real estate note, to foreclose on. If the business fails there will not be much to go after except the assets associated with the business. Although, assuming the promissory note is personally guaranteed, the investors risk will not be as much because the payer is still liable for payment. An investor is looking to make a higher yield on this type of transaction because of the obvious greater risk and minimal security that a standard Mortgage note would bring.
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