How to Sell a Promissory Note?

Key takeaways:

To sell a promissory note, first have it professionally appraised to determine its current market value, then locate a reputable note buyer or brokerage platform, ensuring all terms are clearly defined and both parties are in agreement before finalizing the sale. Always consult legal counsel to ensure the transaction is legally sound.

The quick origination process, greater flexibility, and higher returns make promissory notes an excellent investment option against other credit funding types. Although owning a promissory note is easier than most other loan investment choices, selling the same can get complicated. 

In such negotiations, a step-by-step guide on how to sell a promissory note can be a relief. So, if you are a potential note seller, here is some must-read information and tips you can't afford to disregard.

But, before we proceed, let's understand more about the promissory note! 

What is a promissory note? 

Simply put, a promissory note is a document with an unconditional promissory transaction note of a specified amount, time, and intervals between two or more parties. Some promissory notes are on-demand notes where the borrower has to pay the amount when demanded. Also, the note may contain other terms and conditions agreed upon between the parties. 

Every debt instrument has an issuer of the note and a beneficiary. The two parties can be note buyer and seller or lender and borrower. 

Types of Promissory notes 

When you sell the mortgage note, the primary process remains the same, with minor changes according to the type of note. Therefore, it's important to know the different types of promissory notes and how their selling can differ. Below are types of promissory notes based on two grounds.

Types based on security

• Secured Promissory Notes: The notes with mortgage or asset collateral are generally more accessible and easily accepted in the market. These are also known as collateral promissory notes. 
• Unsecured Promissory Notes: Unsecured promissory notes are simple promissory notes. They may not have an asset as a security in case of default. 

Types based on usage

• Promissory notes as corporate credit: When businesses issue promissory notes for financing for a small period, they are called corporate credit promissory notes. Such notes can be used in several instances, for example, during the pre-sale period of products when merchants'/creditors' dues are to be paid off. Drawing such bills of exchange guarantees future payments for merchants. Besides, it builds trust as the amount is paid soon after collecting accounts receivables.
• Promissory notes as the lender of last resort: These are used as a business loan when a firm's other credit options are exhausted. Although a risky bet, this serves as an opportunity to yield potentially higher ROI for loan investors. 

• Promissory notes as funds: Some companies use them to raise funds for their startups and businesses. Issuing a promissory note creates an advantage for firms since investors are assured that the project has the potential to pay the principal amount along with interest as returns. This funding mechanism brings win-win results for both startups and investors. 

Why sell a promissory note

Be it investing or selling the note; you can optimize your returns from promissory notes when you do it at the right time. While most companies sell promissory notes for instant ROI, there are several other reasons a bill of exchange is sold. 

• Quick Recovery: Retrieving the money from debt investment can get difficult as it ages. Older notes typically have lesser value in the market. If held for too long, the owner may have to incur losses as a consequence.  

• Reinvesting in new notes: When you sell your note at the right time, the same can be channelized towards new investments. Most importantly, it cuts the operational costs of recovering default notes, thereby helping balance the company's net income. 

• Reduce legal risks: Recovering methods can saturate after a point which leads to legal risks. However, when your note is out there in the market for professional buyers, you can minimize the legal complexities involved in recollecting old debt. 

What to consider when selling a promissory note? 

Be it a personal or commercial promissory note, there are certain factors that one must take into account before selling it. Here's a step-by-step guide for promissory or mortgage notes sales. 

Step 1: Prepare a masked file

The Excel spreadsheet with masked personal information on the borrower of the note, including:

1. Personal Identifier Information (PII) 

The information about the debt to be provided should include the following data: 

2. The geographical location of the debtor, 

3. The amount of debt, 

4. FICO score, 

5. History of payments,

6. Judgment information.

Step 2: Prepare all original documentation of the debt portfolio

There’re 2 ways of how media can be stored:

1. Electronically (the sale process and the portfolio price will usually be higher because the buyer can start working with the portfolio immediately after signing the PSA).
2. Hard copies ( need to ask to prepare media for sale by putting them in separate boxes)

Before selling debt portfolios, please make sure about the availability of original documentation. 

Step 3: Underwriting and closing on a promissory note 

After the paperwork is produced for both parties, the next step is appraisal and title search for the concerned note and mortgage asset. The buyer will be interested in knowing the value of the note and mortgage asset. Similarly, as a seller, you should know if the buying party is ready to spend on title search charges, appraisal fees, or BPO. 

Step 4: Understand each contract

Terms and conditions in each contract involved can affect you differently. Give special attention to transaction-related details. Here are a few examples of documents that you may come across during the deal:

• Letter of Intent: A promissory note trade can go through negotiations, after which the buyer accepts an offer. That's when the Letter of Intent is handed to the noteholder confirming the price and intent of purchase. Read the clauses carefully, which may include a term giving the note buyer power to revoke the price agreement. 

• Purchase and sale agreement: The most important document during the deal, the contract binds both buyer and seller to complete the trade for the specific product, here, the promissory note. The document legally confirms the trade agreement between the two parties. 

• Commitment letter: Unlike the Purchase and Sale Agreement, it is a unilateral document obligating the note holder. Here, the owner agrees to sell their promissory note at a specified price. 

• Non-disclosure agreement: As the name suggests, it is a privacy protection document. Meaning, any of the parties involved cannot disclose any information shared during the deal. 

• Payout agreement: The document obligates both parties to pay a certain amount or percent of the deal to the broker after the deal is closed. 

Step 5: Close the deal

Finally, you can schedule the closing after the contracts are prepared and due diligence is followed. As specified in the agreements, the seller should receive their payment at the end. This process can typically end within 15 to 35 days. 

Selling an unsecured promissory note 

If your promissory note is not secured by any asset or property, the potential buyers' list can become smaller due to the higher risk involved in the deal. Here, the seller can trade off through a higher discounted value. In such cases, most sellers prefer cashing the bill with financial institutions at a lower face value. While for most promissory notes, the discount range starts from 10%, whereas for an unsecured bill, it can go up to 35%.

The payer's credit rating plays a vital role in an unsecured note trade. Also, the discount may vary according to the interest rate and note amount. Circumstances like default bills can delay the process, or such notes are less likely to be bought.  

Selling the promissory note at the right time through proper channels and means can save you from possible bad debts and losses. Further, with the right negotiation skills, you can recover your money and benefit yourself with a good ROI on the note. 

Find the best buyers from reliable sources, and the rest is the path already shown to be followed. Following the steps from this article will ease and speed up the process of promissory note sales. Contact lawyers if you require further information.