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What Are Cash Flow Notes And Why Do You Need Them?

Mar 27, 2008
Cash flow notes are legal contracts which document financial transactions between two or more parties. Currently there are more than sixty different types of cash flow notes. Some of the most common include: real estate, structured settlement, business notes and seller carry back financing.

Real estate cash flow notes and land contracts are secured by real property. These might include commercial buildings, vacant land, single dwelling houses or multi-family dwellings such as an apartment complex.

Real property is used as collateral and will be used for payment if the borrower defaults on their loan. The real estate cash flow note is attached to the mortgage or trust deed documents. Many types of real property can be used to secure real estate notes. In addition to buildings, land and homes, other types of property include mobile homes, boats and even airplanes.

Structured settlement cash flow notes are secured by life insurance annuities. This type of financial arrangement is used to compensate individuals who have been injured due to the negligence of another person or organization. Structured settlements are also used when people win the lottery and choose to receive annual payments instead of a lump sum cash payment.

The downside of structured settlements is they offer little flexibility and can rarely be altered once they are signed. The upside of structured settlement cash flow notes is individuals can sell either the entire cash flow note or a portion of it. Some restrictions apply when selling structured settlement payments. Typically, individuals who desire to sell their structured settlement must obtain authorization from the court.

Business cash flow notes are secured by business assets. There are several types of business notes, but the most common include Factoring, Purchase Order Funding and Seller Carry Back.

Factoring is one of the most common types of business cash flow notes. This type of transaction involves the sell of account receivables to a funding source known as the Factor. The Factor provides funds on receivables owed to the business and charges a small fee for the loan. In most instances, a Factor will only purchase between 70 and 80 percent of the notes receivable.

Let's say a business owner possesses $10,000 in accounts receivable. These funds will be paid to the business owner within 30 to 90 days. The owner can sell a portion of these receivables to the Factor. If the owner sells 80 percent, he will owe the Factor $8000, along with the fee. Once the business owner receives payments from his client, he then pays back the borrowed funds.

Purchase order funding is similar to Factoring. However, instead of selling accounts receivable, the business owner sells purchase orders. If the owner has signed purchase orders for $10,000 he can sell up to 100 percent of his upcoming purchase orders. This type of cash flow note is usually reserved for business owners who possess purchase orders backed by credit-worthy customers.

Seller carry back cash flow notes are created when a business owner provides financing to a new buyer. This type of financing is particularly helpful for small business owners who are unable to obtain funding from traditional lenders. In seller carry back financing, the owner can offer up to 100 percent of the funding. Typically, sellers will offer 10 to 20 percent of the financing and the buyer will obtain the rest through conventional lenders.
About the Author
Simon Volkov is a Private Note Investor who assists individuals in liquidating their assets. Simon specializes in Cash Flow Notes, Foreclosures, Probate, Short Sale and Real Estate Notes. Get the help you need by visiting www.SimonVolkov.com.
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