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Business Promissory Notes Are Valuable Investing Tools

July 07, 2012 | Comments: 0 | Views: 191

The Sin of Self-Delusion

All investing is an inexact, challenging activity. Investing is more like an art form than an actual science. Specialized investing, such as promissory note investing, is a relatively small and distinct category that has many of its own individual rules. Business note investing, a sub-category of note investing is even more special and distinct; it has additional special considerations and rules that impact its successful implementation.

Today, in this low interest rate environment, investors are looking for higher yields than what are being offered by traditional investments. Bank savings accounts, Bank Certificates of Deposit, U.S. Government Bonds, and most corporation bonds are just not doing the job. They do not provide a high enough yield.

You should seriously consider investing in promissory notes, in general, and business promissory notes in particular, if you truly want to enjoy higher yields. They really do provide higher yields. But, don't overestimate your own knowledge of the subject, or underestimate its uniqueness. Don't delude yourself with overconfidence. Get expert guidance to avoid making unnecessary errors in the valuation and risk associated with business note investing. Work with an experienced business note expert.

The Keys to Smart and Profitable Business Note Investing

Typically, when a business sells, the buyer needs financing to consummate the purchase. The source of financing may come from a bank, or from a private lender, or from the seller of the business; and, as is often the case, the financing is a combination of these sources. In this article our focus is not on the bank financing aspect, it is on the private lender financing and the business seller's financing. These two financing sources are evidenced by private business promissory notes.

We will focus on the "business loan package". It consists of the business note and all of the additional loan documents contain in the "loan package". The goal of this article is to identify and explain some of the key concepts and negotiating points inherent in business notes and business note financing. The appraisal and valuation of business notes is based upon understanding the impact of these key elements and their relationship to the fair market value of a business promissory note. The value of your investment depends on the proper structuring of the "loan package".

Key Elements

Repayment Period: typically, a term of two years to ten years is reasonable; from the lender's point of view; a repayment period of two to five years is desirable; from the borrower's point of view, five to ten years is desirable.

Payment Schedule: typically, regular payments of principal and interest are schedule monthly or quarterly; this plan of combining interest and principal in one payment is called an "amortizing loan": it is self-liquidating. This plan is best for the lender.

Interest Only-Balloon: this payment schedule is not self-liquidating. The borrower makes periodic payments of interest only, no principal reduction. At the end of a specified period the entire unpaid balance comes due in full. This happening is called the "ballooning of the principal owed". Many borrowers favor this plan because it reduces the amount of their periodic payment.

Down Payments: typically 20% to 35% of the purchase price is required as the down payment; this range is best for the lender; borrowers usually favor lower down payment amounts.

Interest Rate: typically the interest rate is above the prime bank lending rate---usually in the range of 6.5% to 9.0%; if the loan period is for over two years, the interest rate may be "adjustable" annually or "floating" in order to keep its relationship to a benchmark rate or the inflation rate. Naturally, the lender wants to get the highest rate available, and the borrower want to pay the lowest rate.

Collateral Security: generally, the borrower's promise to repay the loan is supported or by/backed-up by some tangible asset; that asset is called "collateral security" because it is not the primary security; it is only available if the borrower defaults on the repayment promise. The specific type of asset used is dependent on the nature of the business and the elements of the transaction. It can be real estate, a co-signer, inventory, accounts receivable or any combination of these. As is normal, the lenders want as much collateral security as possible and the borrower want to provide as little as possible.

Summing It Up

In today's investing world, higher yielding investments are scarce. Business promissory notes provide higher yields and reasonable safety if the loan package is properly structured. There are specialized experts who can advise and guide the investor. If you're unfamiliar with business note investing now, look into it as a source of higher yields for your investing dollars.

Wisdom

There cannot be a higher investment income without the potential of a higher risk of loss.

How many of your "wins" came without some fear of failure?

How's your risk balance? The sweet spot in investing is being aggressive enough to always be moving ahead.

If you only go where you know, you'll not likely get where you want to be.

Source: EzineArticles
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