Business Note

A business note is a promissory note created when a business is sold with seller financing — the seller of the company carries part of the purchase price, and the buyer repays it over time. It is the business-sale cousin of an owner-financed mortgage note: instead of financing real estate, the seller is financing the sale of a company, its assets, or its goodwill. Business notes are a recognized type of cash flow note, and while they can be bought and sold, they are generally riskier and priced more conservatively than real-estate-secured notes.

How a business note is created

When someone sells a business — a restaurant, a service company, a franchise — the buyer often cannot pay all cash and cannot easily get a bank loan for the full amount. The seller bridges the gap by carrying a note: the buyer makes a down payment and signs a promissory note for the balance, repaid with interest. The note may be secured by business assets, equipment, a UCC filing, a personal guarantee, and sometimes by real estate if the deal includes property.

Why business notes are riskier than mortgage notes

The central difference from a mortgage note is the collateral and its durability:

• A mortgage note is backed by real estate — a tangible, durable, recoverable asset with established value and a clear foreclosure path.
• A business note is often backed by the ongoing success of the business — cash flow, equipment, inventory, and goodwill. If the business fails, the collateral can evaporate; used equipment and a defunct brand recover little.

Because repayment depends heavily on the buyer successfully running the business, a note buyer underwrites the business's performance, the buyer-operator's experience, the down payment, any personal guarantee, and whether real estate is also pledged. The uncertainty means business notes trade at deeper discounts (higher required yields) than comparable mortgage notes, and many note buyers either avoid them or buy only well-secured, seasoned ones.

What makes a business note more sellable

• Real estate included in the collateral (a business-plus-property note behaves more like a mortgage note)
• A strong personal guarantee from a creditworthy buyer
• Solid seasoning and a clean payment history showing the business is thriving
• A meaningful down payment (lower effective leverage)
• Documented business financials proving cash flow covers the payments

What it means when you sell

If you hold a business note, be ready to document both the note and the business: the collateral (assets, UCC filings, guarantees, any real estate), the buyer-operator's track record, the down payment, the payment history, and current business financials. Disclose whether real estate secures the note — it materially improves value. Mortgage Note Capital concentrates on real-estate-secured notes; a business note secured partly or wholly by real property is the most relevant case, while purely business-asset notes are evaluated cautiously given the higher risk.