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Risk Management for Promissory Note Investing

July 09, 2012 | Comments: 0 | Views: 177

You Must Take Calculated Risks to Succeed.

Financial Education is the Key A wise investor said that an ounce of prevention is worth a pound of cure. This principle applies directly to promissory note investing. In the case of note investing the ounce of prevention is financial education. Since all investing amounts to risk taking, to one degree or another, the successful investors are the risk educated and risk aware individuals.

Promissory Note Investing Has 3 Types of RiskRisk #1: Enforceability. Because the core of a promissory note is a promise of repayment, and because promises are often broken, the promise has to be enforceable in a court of law.

In order for enforceability to be present in the note, its drafting and wording must contain: a specific promise to repay a specific sum of money, including interest, at a specific rate, on a specific time schedule, at a specific location. If these points are not clearly stated a dispute will arise and enforceability may not happen.

Risk #2: Collectability. Investing in a note that is enforceable in a court of law is a poor investment if the ability to collect the money owed is impaired. Obtaining a judgment and a lien against an individual having no assets and no income is a hollow victory. You have won your case but have lost your investment.

In order to have a collectable note, the borrower's assets and income must be verification and confirmed, before lending or investing your money. Additionally, the note should be "collateralized" and "secured" by appropriate liens and encumbrances on those assets. Adequate and proper collateral security is what makes a note collectable after the borrower has defaulted.

Risk #3: Marketability. Often, after investing cash in a promissory note, the investor has a new need for additional cash; unexpected medical expenses, an unexpected decrease in income, and an unexpected family financial requirements, are example that can trigger a new need for cash. If the note investment has been properly constructed and documented it can be used as collateral for a bank loan; or, a portion of the note can be sold to another investor to raise cash.

The key to having a marketable note is having expert guidance before the promissory note is created. Expert guidance will determine the proper amount to loan, the proper interest rate, the proper repayment term and repayment amounts, and the proper collateral security. If any one of these elements is not designed properly, the marketability of the note will be impaired.

Conclusion All investing has risks. You must take calculated risks to succeed. Financial education is necessary to make intelligent, calculated investments. Financial education helps you to be sure that your promissory note the necessary key elements. The key elements are: enforceability, collectability and marketability.

Wisdom "The more you seek security, the less of it you have. But the more you seek opportunity, the more likely it is that you will achieve the security that you desire."

"People who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year."

"Risk comes from not knowing what you are doing."

Source: EzineArticles
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