A business note is created when the owner of a small or medium-size business offers financing to assist in the sale to a buyer. That owner can later sell the business note to a business note buyer — similar to selling to a real estate note buyer, except that business notes are secured all or mostly by a business rather than by real estate. Due to the specialization needed and the risks involved, there are fewer business note buyers than real estate note buyers. A business note can be created instead of or in addition to using traditional bank financing.
It is usually more difficult and time-intensive to get a bank loan for the purchase of a small business than it is to get a loan for a home or building. This can be attributed to a variety of reasons, but is generally related to the amount of collateral available to secure the loan. In other words, these types of loans are riskier to the lender.
When the seller and buyer of a business agree to move forward with their transaction, they quickly find out that pursuing financing using SBA loans is long and difficult. Using owner financing instead will speed up the process significantly, and will help both parties to get what they want.
According to leading experts, approximately 350,000 businesses are believed to be sold each year in the U.S. using owner financing. Of those, there are perhaps 245,000 that created business notes that could be sold to a company such as ours. As banks and the government continue to make it difficult for small businesses to obtain loans, using owner financing to create business notes is an excellent alternative to fill that void.
Guidelines for Business Notes
The list below provides parameters that we utilize when deciding whether to purchase a particular business note. Although we like to see all of these items, lacking strength in one area is sometimes acceptable if the other elements are especially strong.
- Minimum 20% cash down payment by the buyer
- At least one payment has been received from the buyer
- Personal guarantee from the buyer and should have a decent credit score with no recent major delinquencies
- Business is profitable, and annual cash flow for the 12 months preceding the sale is sufficient to cover the new annual note debt
- Term on the note should be 6 years or less, with full amortization (no large balloon payments at the end)
- 1st liens only
You can sell a business note regardless of the industry in which you participate. Yes, we do especially like to see businesses that can weather economic downturns and that have relatively small transaction amounts, but we have a lot of flexibility in making offers for various types of notes.
As with other types of notes, business note buyers can purchase all or only a certain number of the payments that you are receiving. Often, selling just some of the payments of your business note (called a partial) is a better option for all concerned, as it results in better pricing and more flexibility for you, the note holder.