A business note is similar to a real estate note except that the collateral is mostly an actual business rather than real estate. Uh huh, so tell me again what is a business note? Okay, let’s try an example where Shelly Seller decides to sell her printing business to Bobby Buyer. Shelly leases the property where the property is located, and thinks that the business and its assets are worth $300,000. Bobby agrees to the price but he does not have $300,000 available and cannot get a loan from his local bank, so seemingly has no way to buy the print shop. Shelly believes that Bobby would be a reliable payer and capable of managing the business, so she proposes an owner financing arrangement in which she sells to Bobby using the following figures:
Sales price: $300,000
Down payment: $100,000
Original note amount: $200,000
Terms: 15 years, 7% interest rate, monthly payments of $1797.60
Normally, a list of documents are drawn up by an attorney, including one showing exactly what assets are being sold and another stating the terms for payments. The latter is called the business note, the promissory note, or simply the note.
In this situation, as is often the case, owner financing saved the sale and gave both buyer and seller what they wanted. Creating a note rather than having the payer get a bank loan is generally faster, cheaper (less upfront fees), and simpler.
Once Bobby starts making payments to Shelly, she may decide that she needs more cash now. Perhaps she is starting up a new business, needs to pay down some debts, or just wants to take a long vacation. Shelly could choose to contact a business note investor or broker like Seascape Capital about selling the note. However, Shelly will want to first make sure that her transaction meets the following minimum requirements:
1. At least a 25% down payment was paid by Bobby
2. Business is profitable now and viable longer term
3. Payer has excellent credit and is capable of managing this type of business
4. At least three monthly payments have been received from Bobby
5. There are no other large liens or liens superior to Shelly’s lien against the business
6. No large balloon payment is required at the end of the term
Business notes are more difficult to sell than real estate notes because of their additional inherent risk. After all, if the payer defaults, the investor has neither the expertise nor the interest in running the business. Most business notes that come across my desk are missing two or more of the above elements, which usually means that we cannot buy the note, so it is important to go over the list before closing the transaction.