We have been purchasing notes, mortgages and real estate contracts for over a decade and we pride ourselves on a unique client experience at the best price possible.
What you need to know about creating a business note and how to find a viable borrower.
If you have tried to create and sell business notes, you likely already understand how challenging it can be. So what makes a borrower viable when a person or company wants to create a valuable business note to sell on the secondary market, and more importantly, what is the business note buyer looking for?
These two above items are at the very top of the list of important characteristics when you’re looking to price and sell business notes for full purchase. If the credit score is below a 625 FICO middle-score or the borrower does not have the ability to put down at least 30% or more, the business note may not sell at all (as full-purchase).
A personal guarantee is included with a loan when the borrower is a corporate entity (LLC, etc) and not a private individual. If a business seller sells their small business to a corporate entity and does not ask the borrower to agree to a personal guarantee, this could negatively affect the loan’s value on the secondary market by thousands, if not tens of thousands of dollars. It is that important!
In the case of a loan default by a corporate borrower, the borrower can avoid repayment by dissolving the articles of organization or incorporation, depending on the entity’s business structure. Once the company is dissolved, in the eyes of the law, no one can legally be held accountable, thus the holder/seller is out their money. There is absolutely no recourse.
Also, in some cases, keep in mind that some business loans do not even have tangible collateral such as: a client list or shares in a company, etc. When it comes to repossessing this type of collateral in the case of default, it could become extremely tricky to accomplish. It is definitely not like repossessing a car or foreclosing on a property.
As the saying goes, it is like comparing apples and oranges. A simple way to avoid this costly mistake when selling to a corporate borrower, is to require and include a written personal guarantee by the borrower.
When creating a seller carry-back business note with the intention of selling the loan to a note buyer, one must keep several things in mind when deciding the loan’s terms and structure:
As every buyer is different, most buyers do like to see at least 3 to 12 months of seasoning before placing a bid on a note for sale. This particular item does tend to vary between buyers. For the most part, many buyers will most likely decline on a loan that has not been seasoned at all (simultaneous closing, etc.).
The seller may need to collect at least 3 payments before submitting the note for purchase. This way, there is some sort of visual indication of positive performance pertaining to the loan. We at AX have been involved in instances that allowed this item to be waived, due to a large down payment submitted by the borrower at origination (50% down or more).
Out of all of the above listed items, loan seasoning is truly a matter of an investor’s preference. It is mandatory with us at AX to have a business loan seasoned by at least 3-6 payments before we can buy it.
Payment record keeping is an extremely important item that must be practiced in order to prove that the privately held loan will be predictable as an invest. Record cleanliness is a characteristic that most if not all buyers would review during the pricing and underwriting of that asset.
It simply requires that the seller produce either canceled checks (proving payments collected), bank statements showing payments deposited/received (hard-copy or digital), or deposit slips (with bank stamp on them (showing proof of payments received).
This also goes for the down payment as well. If you cannot prove that money exchanged hands, you will have a tough time maximizing your profits when selling the business loan to an investor. Also, if you receive money orders from the borrower, simply make photocopies prior to cashing them. There is no need to make copies if you deposit the money orders into your bank account (as this will be reflected in the bank statements).
Executing the above-mentioned suggestions will lay a strong foundation for engineering a high-value business loan that will successfully sell on the secondary market. Also, always use an attorney to draw up the closing documents (i.e. the actual note, the asset purchase agreement, and most importantly the security agreement).
If you’re looking to sell business notes or restructure a business note for resale, corners should never be cut. If they are, a seller should expect friction, delays, disappointment, and of course the possibility of getting stuck with the loan. Properly informing yourself (or your seller) on structuring a business loan for resale will make the difference between selling it or not.
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