A cash flow note is a financial contract used in various situations, including retail businesses and real estate deals. Borrowers promise to repay lenders, with repayment terms linked to the advance receipt of funds. Immediate cash is a benefit, but failure to repay could result in interest and penalties.
A cash flow note is a type of financial contract that serves as documentation of a debt that the borrower promises to repay the lender. Notes of this type are used in a variety of different situations, including retail businesses, real estate deals, and even court settlements. Repayment terms are normally linked to the advance receipt of funds by the borrower who are more or less committed to withdrawing the debt obligation.
One of the most common examples of a business cash flow note involves borrowing funds against receivables for a specific billing period. In this borrower, the lender would forward the funds to a debtor, based on the face value of the bills issued by the borrower to its customers. The terms of the cash flow note would allow the debtor to present the lender with full payment once invoices have been paid in full or to issue a series of installment payments over a specified period of time. Typically, some interest is applied to the outstanding balance at various points between the loan issuance and the settlement date. While some arrangements would require payments on individual bills to be forwarded directly to the creditor, most rely on the debtor to handle receiving those payments and then pay the note directly.
One of the benefits of a cash flow note is the immediate cash generated by the deal. Instead of waiting for advance funds to be received, the debtor is able to pay off other debt obligations, thereby avoiding fees and interest charges. This type of third party loan is also relatively easy to arrange and does not need to be set up on a recurring basis, as is often the case with credit advances purchased from a factoring company. For businesses that need short-term cash to pay off debts now rather than later, this one-time loan deal is an excellent option.
There are also a couple of potential drawbacks to the cash flow note. In the event that the borrower is unable to repay the borrowed amount under the terms, there is a good chance that further interest and penalties may apply to the outstanding balance. This could fully offset any funds saved due to the cash advance. Additionally, failure to meet the terms of the cash flow note could inhibit the debtor’s ability to obtain financial assistance in the future and possibly damage the company’s credit rating generally.
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