Cash Flow Notes
Cash flow notes are legally binding contracts which provide details of financial transactions between two or more parties. There are approximately 60 variations of cash flow notes. The most common include real estate, land contracts, seller carry back financing, structured settlements and business notes.
Real estate cash flow notes, including land contracts and seller carry back financing, are secured by real property. The property is used as collateral in the event the borrower defaults on their loan. Real estate cash flow notes are attached to mortgage or trust deed documents.
Many types of real property can be used to secure real estate cash flow notes. These might include single dwelling homes, mobile or manufactured homes, multi-family dwellings such as duplexes or apartment buildings or commercial buildings.
Structured settlement cash flow notes are used to compensate individuals who have been injured due to negligence of another individual or organization. Structured settlements are also used to compensate individuals who win lottery jackpots and elect to receive annual payments instead of a lump sum cash payment.
Structured settlement cash flow notes are secured by life insurance annuities. The downside of structured settlements is they offer little flexibility and require court approval prior to being sold. The upside of structured settlement cash flow notes is the note holder can choose to sell either the entire note or a portion of it.
There are several types of business cash flow notes. The most common include: Factoring, Purchase Order Funding and Seller Carry Back Financing. Business cash flow notes are secured and protected by business assets.
Factoring is the most common type of business cash flow notes transaction. Factoring involves the sale of account receivables to a funding source known as the Factor. The Factor provides funding based on receivables owed to the business. In most cases, the maximum funding a Factor will offer is between 70 and 80 percent of the notes receivable.
Purchase order funding is similar to Factoring. Instead of selling accounts receivable, the business owner sells upcoming purchase orders. Business owners can sell up to 100 percent of upcoming purchase orders. Purchase order funding is typically reserved for business owners who hold purchase orders backed by creditworthy clients.
Seller carry back financing cash flow notes are used when a business owner sells a business to a buyer and finances the transaction. Seller carry back financing is beneficial for small business owners unable to obtain funding from traditional lending sources. Business owners who provide financing can sell seller carry back cash flow notes in full or partial.