What Are Cash Flow Notes and How Can I Benefit from Them?

Overview of Three Common Cash Flow Notes

Cash flow notes are legally binding contracts which document the promise of the borrower to repay the lender. Currently, there are more than sixty types of cash flow notes. Some of the more common types include real estate, structured settlements and business notes.

Real estate cash flow notes are secured by real property such as a commercial building, residential house, mobile home, automobile, boat or airplane. When real property is used to secure real estate notes, a mortgage or trust deed is added. Should the borrower default on the loan, the real property can be sold and used to collect on the debt.

Structured settlements are financial instruments used to compensate individuals who have been injured due to the negligence of an individual or organization. This type of cash flow note is secured using annuity payments provided by life insurance companies.

Typically, annuity payments are paid to the recipient over an extended period of time. Depending on the circumstances, individuals might be able to sell all, or a portion of their structured settlement to a private investor in exchange for a lump sum cash payment.

Business cash flow notes are secured by assets owned by the business. This type of cash flow note is more complex and usually requires the assistance of a financial advisor. There are different types of business cash flow notes including: Seller Carry Back Notes, Purchase Order Funding, and Factoring.

Seller Carry Back Notes are used when a business owner provides financing to the borrower. Owner financing is a popular choice for small business owners since it is oftentimes difficult to obtain loans from traditional lenders.

With Purchase Order Funding, the business owner uses purchase orders to secure the cash flow note. This type of cash flow note is only available when purchase orders are backed by credit-worthy customers. In essence, the Borrower and Lender are taking an equal risk and banking on the fact the customer will make good on his order.