Business Promissory Notes Are Valuable Investing Tools

Understanding the Value of Business Promissory Notes The Sin of Self-Delusion All investing is an inexact, challenging activity. Investing is more like an art form than an actual science. Specialized investing, such as promissory note investing, is a relatively small and distinct category that has many of its own individual rules. Business note investing, a sub-category of note investing is even more special and distinct; it has additional special considerations and rules that impact its successful implementation. Today, in this low interest rate environment, investors are looking for higher yields then what are being offered by traditional investments. Bank savings accounts, Bank Certificates of Deposit, U.S. Government Bonds, and most corporation bonds are just not doing the job. They do not provide a high enough yield. You should seriously consider investing in promissory notes, in general, and business promissory notes in particular, if you truly want to enjoy higher yields. They really do provide higher yields. But, don’t overestimate your own knowledge of the subject, or underestimate its uniqueness. Don’t delude yourself with overconfidence. Get expert guidance to avoid making unnecessary errors in the valuation and risk associated with business note investing. Work with an experienced business note expert. The Keys to Smart and Profitable Business Note Investing Typically, when a business sells, the buyer needs financing to consummate the purchase. The source of financing may come from a bank, or from a private lender, or from the seller of the business; and, as is often the case, the financing is a combination of these sources. In this article our focus is not on the bank financing aspect, it is on the private lender financing and the business seller’s financing. These two financing sources are evidenced by private business promissory notes. We will focus on the “business loan package”. It consists of the business note and all of the additional loan documents contain in the “loan package”. The goal of this article is to identify and explain some of the key concepts and negotiating points inherent in business notes and business note financing. The appraisal and valuation of business notes is based upon understanding the impact of these key elements and their relationship to the fair market value of a business promissory note. The value of your investment depends on the proper structuring of the “loan package”. Key Elements Repayment Period: typically, a term of two years to ten years is reasonable; from the lender’s point of view; a repayment period of two to five years is desirable; from the borrower’s point of view, five to ten years is desirable. Payment Schedule: typically, regular payments of principal and interest are schedule monthly or quarterly; this plan of combining interest and principal in one payment is called an “amortizing loan”: it is self-liquidating. This plan is best for the lender. Interest Only-Balloon: this payment schedule is not self-liquidating. The borrower makes periodic payments of interest only, no principal reduction. At the end of a specified period the entire unpaid balance comes due in full. This happening is called the “ballooning of the principal owed”. Many borrowers favor this plan because it reduces the amount of their periodic payment. Down Payments: typically 20% to 35% of the purchase price is required as the down payment; this range is best for the lender; borrowers usually favor lower down payment amounts. Interest Rate: typically the interest rate is above the prime bank lending rate—usually in the range of 6.5% to 9.0%; if the loan period is for over two years, the interest rate may be “adjustable” annually or “floating” in order to keep its relationship to a benchmark rate or the inflation rate. Naturally, the lender wants to get the highest rate available, and the borrower want to pay the lowest rate. Collateral Security: generally, the borrower’s promise to repay the loan is supported or by/backed-up by some tangible asset; that asset is called “collateral security” because it is not the primary security; it is only available if the borrower defaults on the repayment promise. The specific type of asset used is dependent on the nature of the business and the elements of the transaction. It can be real estate, a co-signer, inventory, accounts receivable or any combination of these. As is normal, the lenders want as much collateral security as possible and the borrower want to provide as little as possible.

How to Approach Private Lending

1. Find a Lender /Borrower
Private lending has experienced an explosion of growth due to many of today's economic factors.

Borrowers: Banks and commercial lending houses have tightened requirements and are declining normally acceptable risk loans. Borrowing money from someone you know makes a lot of sense!

Potential Lenders: These are people that have established themselves and are in a position to loan money. They also may find that the interest rates they are being offered by banks in the form of CD's and other investment vehicles too low. Usually this is someone you know and wants to see you succeed.

2. Agree on Loan Terms
Pick and agree on the loan terms you will use. Standard terms include:
• Loan amount
• Interest rate
• Term
• Repayment type
• Repayment frequency
Interest rates vary, so use our Resource Center to help you choose. You and your lender should discuss the alternatives that you each have and agree on the rate that provides a win-win situation for you both.
3. Create Formal Documents
Approach your lending relationship in a professional manner. Introduce a neutral "third party" that can help eliminate the emotions from the transaction.

You will need a promissory note to document the loan.

The Agreement Builder™ will guide you through the process of creating a professional Promissory Note. You input the amount of the loan, interest rate, repayment terms (months/years), due dates and any special conditions and The Agreement Builder™ creates a legally binding promissory note.
4. Set up a Repayment Plan
One2One's Agreement Builder™ generates a list of due dates and payment amounts ($) that make up your repayment schedule for your loan agreement.

The Borrower must remember to send a check in advance of each due date. There is usually no "payment book" or monthly invoice that is created by the Lender. You can also have an accountant or private lending company service your loan.

Remove the on-going, potentially emotional hassel: have One2One Lending send e-mail payment reminders to the Borrower on behalf of the Lender. Stick to your loan agreement!

Promissory Note Forms: Advantages For Business Owners

Most people have the need of a promissory note form at some point during their business or personal dealings. For example, you might sell a painting from you estate. If you lend money to a family member it is important that you have an agreement that covers all the important points upon which you and the other party have agree. These and many other types of common documents need to have standardized wording. Here are a few of the reasons why getting your documents prepared and printed online with One2One Lending makes good sense.
Small business owners use many promissory note documents in their transactions. Some online forms that are available are related to a particular type of business. If you use a standard form that has the entire promissory note wording, your business will be perceived as responsible and professional. Novices who use hand-written or improperly prepared documents may find that they didn’t cover all the necessary terms in preparing the forms.
A document prepared by an attorney will have the required wording and include all the necessary components. If the document is technically correct, you are less likely to get into trouble with your promissory note later on. If you have a promissory note from One2One Lending and are still uncertain, take the prepared form to an attorney and ask for a review. This method will still save you money, as it requires less attorney time to review.
Even the simplest form prepared by an attorney can be very expensive. Attorneys typically charge by the hour and bill in fifteen minute segments. So a form that takes only a couple minutes to locate and print may end up costing you significant money. Using online forms also saves you time, since you don’t have to go to the attorney’s office, set up an appointment and return a second time to pick up the completed documents.
When you use online services, it’s easier than explaining to an attorney what it is you want prepared. Online documents allow you to receive a finished product that fits your exact circumstances. With online forms, you answer a few questions, review the completed document online and print the copy for your use.
The forms are completed seamlessly online so that the printed product appears to be custom prepared with your information included. The document looks professional. You won’t have to use a pre-printed form and fill in blanks or cross out sections that don’t apply.
Online promissory note forms make a lot of sense in many situations. The document you receive will have all the needed promissory note terms so that it is precise. It takes only moments to have a document that is specific to your own needs.

Rent versus Own Calculators

Read most “rent vs. own” articles, and you’ll typically see advice like, “Normally it’s better to own than rent. Here’s a calculator to help you decide which is best for you.” Then they’ll show you a calculator like one of these:
• New York Times Rent Vs Own Calculator
• Smart Money Rent Vs Own Calculator
• Motley Fool Rent Vs Own Calculator
But there’s a problem with these calculators. As with many online calculators offering easy answers to complex questions, in order for them to work, you’re required to know the unknowable. For example, you’re supposed to supply the future price appreciation of real estate, annual maintenance costs, initial fix-up costs, what you expect to earn on your savings, your future tax bracket, future property taxes, future rent increases – lots of key variables that virtually nobody can possibly know.
Had you used any of these calculators back in 2006, you’d have bought a house and made the worst investment decision of your life. Maybe it’s time to understand a few fundamentals when it comes to deciding whether to rent or own. Get these down before using any calculator.

In addition to these calculators check out the Resource Center at One2One Lending for more financial help.

Never lend more than you can't afford to loose

If you lend your money that you need and you are expecting repayment in a few days if anything goes wrong, you will not have the money you need for food, gas, etc. This will cause a fight between you and your friend. Lend only what you can afford to give away. Then if you don't get paid back right away, you won't be in trouble.