Understand Cash Flow Notes Before Investing

Anyone interested in winning in the cash flow business needs to gain an understanding first about cash flow notes. These are the legal contracts in which an individual invests money looking for a tidy profit once the "note" is repaid. The most common types of cash flow notes include business, structured settlements and real estate.

Business Notes

Companies receive cash through a business note by securing repayment through pledging assets. These are fairly complex notes requiring the assistance of professional financial advisors. There are several different types of business cash flow notes that include factoring, purchase order funding and the seller carry back notes.

Factoring

Here's where a business will sell their Accounts Receivables to a funding source which is known as the Factor who, in turn, makes a cash advance against any of the Accounts Receivable that come in within the next 90 days. Both a low interest rate as well as a small fee is charged to make a transaction. This is a type of business transaction where the Factor will typically buy between 70 to 80 percent of the outstanding accounts receivable. If a business owner has £10,000 in accounts receivable, a portion of these can be sold to the Factor. If the Factor is willing to purchase 80 percent of these receivables, a loan for £ 8,000 is made. Once the business customers have made their payments, the owner repays the £8,000 along with a transaction fee and accrued interest.

Purchase Order Funding

In this situation, a business owner will place purchase orders as security for obtaining a cash flow note. However, these purchase orders have to be in place by credit-approved customers since the lender is taking as equal a chance that a business owner has pertaining to the risk that the customer will make good on the order.

Seller Carry Back Orders

A seller carry back order is when a business owner provides financing to one's own company. This is often not only a popular choice, but sometimes the easiest way to obtain financing when it is difficult to meet the requirements from traditional institutions.

Real Estate Notes

These notes are pretty much fairly straightforward because they are secured by real property such as a building, home, automobile, boat or even an airplane. The mortgage or trust deed is added to this deal and should the borrower default, the secured property can be sold and used to collect on the debt.

Structured Settlement Notes

This is a popular investment for individuals looking to get into the cash flow note business. These are structured financial payouts made to individuals from insurance companies and other organizations where the recipient receives a set periodic payments over a period of time, such as an annuity paid by a life insurance company. Individuals seeking to receive a lump sum payment are willing to sell their payout arrangement for a reduced amount. Investors will typically provide the annuity recipient a lump sum that is much lower than the aggregate payments made from the financial institution.

Since the return is usually quite profitable, many individuals seek this form of cash flow note investment because it is quite lucrative.

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