Business Notes FAQ

  1. How big a discount is there on the note?
  2. I’ve heard the term “buying a partial.” What does this mean?
  3. I’m holding a note from the sale of my business. Why should I sell it?
  4. How long does it take for the transaction to close?
  5. Will a buyer buy a note where some payments have been late, or where the payor has questionable credit?
  6. Will a buyer buy a note that is in second position?
  7. What it the procedure entailed in selling a note?
  8. Are there any costs or fees to the note seller?
  9. How big can the note be?
  10. How old must the note be?
  11. Does the note have to be guaranteed by the note holder?
  12. If the seller doesn’t like the purchase amount quoted by note buyer, is he obligated in any way to sell the note?
How big a discount is there on the note?

Every note is different. The purchaser of the business note can tell you after examining things like: Maturity date, interest rate, number of payments received, the credit of the payor, etc. All if these factors influence the amount paid for the note.

 

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I’ve heard the term “buying a partial.” What does this mean?

There are two basic ways to buy a note.

  1. The buyer purchases all of the remaining payments due on the note. This is called a full purchase.
  2. The buyer purchases a portion of the remaining payments. This is called a “partial purchase.”

By buying only a portion of the remaining monthly payments on the note, the note buyer is able to pay proportionately more for the note. As a result, the discount is smaller. Once the payments purchased have been made, the remaining payments revert back to the original seller.

For example: If the buyer purchases 20 payments of a 60-payment note, the note seller gets a lump sum of cash immediately and the right to collect the 40 remaining payments when they come due. The note buyer is in a better secured position with less risk, since he is laying out less cash for the partial, but does move into a first security position on the entire remaining note balance while he collects his 20 payments. This decrease of risk to the buyer, with less capital investment, is the primary reason that he can pay proportionately more for the note. The note seller can add the value of the remaining payments (principal and interest) to the lump sum he receives for the purchased 20 payments to determine how much he will earn on the note. Often, this amount is very attractive.

In many cases the seller is better off financially by selling a portion of the payments instead of the entire note (full purchase). Sometimes, after the note is returned to the seller, he decides he wants to sell the remaining payments.

 

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I’m holding a note from the sale of my business. Why should I sell it?

Business notes are usually sold because the individuals holding them are not in the banking business. Therefore, they don’t want the trouble of collecting late payments, and they can use the extra cash for other investments, personal reasons, or to use as a down payment on another business.

 

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How long does it take for the transaction to close?

Usually within 15 to 20 days.

 

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Will a buyer buy a note where some payments have been late, or where the payor has questionable credit?

It all depends on the risk involved. The buyer naturally will pay less for the note. The higher the potential risk of default, the less paid for the note.

 

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Will a buyer buy a note that is in second position?

Only in rare circumstances. Except for very rare circumstances the note must be in first position.

 

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What it the procedure entailed in selling a note?

The purchaser or a business note broker will gather basic information about the note. He or she will also need a copy of the note, a copy of the security agreement, and any collateral listing which is available (equipment, inventory, etc.). The purchaser will then issue a preliminary offer to purchase the note.

If the seller conditionally accepts the offer, the buyer will perform due diligence on the note and the payer, including credit checks, documentation that the note is being paid on time, whether the payer on the note has past business experience, etc.

Assuming that no substantial negatives are found, the buyer will close on the purchase and can usually wire funds to the seller within two to three weeks after the date of receipt of the final documents.

 

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Are there any costs or fees to the note seller?

There shouldn’t be. All costs, fees and commissions should be included in the purchase price. If the buyer asks the seller to pay additional fees, especially before considering the purchase, the seller should find a different buyer.

 

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How big can the note be?

It can be any size, although different purchasers specialize in different sized notes.

 

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How old must the note be?

Usually the more payments made, the lower the discount. Note buyers usually like to see at least four payments or more made on time. The longer the seasoning, (number of payments made) the higher the purchase price.

 

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Does the note have to be guaranteed by the note holder?

Yes and no! Many notes are bought without recourse. Sometimes the buyer may want recourse from the note seller to overcome a bad payment history by the note payer. Giving recourse usually increases the security for the note buyer and may result in a higher price paid for the note. Actually, the note seller doesn’t really sacrifice much by giving recourse, since he already is exposed in the event of default.

 

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If the seller doesn’t like the purchase amount quoted by note buyer, is he obligated in any way to sell the note?

Absolutely not.

 

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