Cash flow notes are legal instruments used to document financial transactions between sellers and buyers. Multiple types of cash flow notes exist. The most common include: real estate, land, seller carry back, business notes and structured settlements.
When cash flow notes are used to buy vacant land or real estate, the property is used as collateral. Real estate notes are attached to trust deed or mortgage documents as a lien against the property. If borrowers default on note payments, the lien holder can foreclose on the property and sell it to another buyer.
Real estate cash flow notes are used to secure a wide range of property including raw land, single and multi-dwelling houses, mobile and manufactured homes, and commercial properties.
Seller carry back notes can be used to secure real estate or business ownership. Using seller carry back, the seller provides all or part of the financing. In most cases, sellers finance 10- to 20-percent of the sale price and buyers obtain financing for the balance through a traditional lending institution. If sellers engage in 100-financing, buyers must obtain conventional financing when the note terms expire. Seller carry back notes typically extend for two to five years.
structured settlements are oftentimes used to compensate individuals who sustained injuries due to negligence of an organization or person. structured settlements are also used to compensate lottery jackpot winners who choose to receive their payout over an extended period of time.
The primary role of structured settlement cash flow notes is to provide long-term financial security to individuals whose injuries prevent them for obtaining employment or to pay for ongoing healthcare.
One major disadvantage of structured settlements is once they are established they cannot be changed. However, structured settlement notes can sometimes be sold in whole or part if the Annuitant requires a lump sum of cash. Most states require Annuitants to obtain court authorization before selling structured settlement notes.
Business cash flow notes use business assets as collateral. There are multiple types of business notes, but the most common include purchase order funding and factoring.
With factoring, business owners sell their account receivables to a funding source referred to as the 'Factor'. Funds are loaned using receivables as collateral. In most cases, the Factor will purchase no more than 80-percent of total owed on notes receivable.
Purchase order funding is similar to factoring. The difference is purchase orders are used instead of accounts receivable. Factors can loan up to 100-percent of the amount of purchase orders. For example, if a business owner holds $100,000 worth of purchase orders, he can obtain a loan up to that amount. This type of cash flow note is typically reserved for businesses holding purchase orders backed by credit-worthy customers.
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