Business Notes

A business note is a legal agreement that a seller can use in the owner-financed sale of a business. A business note offers unique benefits to both the buyer and seller of the business and is more flexible than a conventional business loan. The seller also has the option to sell the business note — at a discounted rate — for a lump sum before the note has been repaid in full.

Terry Turner, Financial writer for Annuity.org
  • Written By
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner is a senior financial writer for Annuity.org. He holds a financial wellness facilitator certificate from the Financial Wellness Foundation and the National Wellness Institute, and he is an active member of the Association for Financial Counseling & Planning Education (AFCPE®).

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    Savannah Hanson
    Savannah Hanson, financial editor for Annuity.org

    Savannah Hanson

    Financial Editor

    Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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  • Financially Reviewed By
    Timothy Li, MBA
    Timothy Li, MBA Headshot

    Timothy Li, MBA

    Business Finance Manager

    Timothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.

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  • Updated: September 14, 2022
  • This page features 3 Cited Research Articles
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How to Cite Annuity.org's Article

APA Turner, T. (2022, September 14). Business Notes. Annuity.org. Retrieved October 6, 2022, from https://www.annuity.org/selling-payments/business-notes/

MLA Turner, Terry. "Business Notes." Annuity.org, 14 Sep 2022, https://www.annuity.org/selling-payments/business-notes/.

Chicago Turner, Terry. "Business Notes." Annuity.org. Last modified September 14, 2022. https://www.annuity.org/selling-payments/business-notes/.

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What Is a Business Note?

A business note — a type of promissory note — is a way to sell your business by providing alternative financing to the buyer. You, as the business seller, provide the buyer with financing, and the business itself acts as collateral while the buyer repays the terms of the sale on a set schedule, usually with interest.

This arrangement affords the buyer the flexibility of using the business’s profits to pay back the terms of the sale. By acting as the lender, you are responsible for performing due diligence regarding the creditworthiness of a potential buyer.

Business notes are like real estate or mortgage notes, with business notes secured by the actual business versus the building or real property which houses the business. The option opens the sale to a wider breadth of potential buyers, including those who can’t qualify for or would have difficulty fulfilling the terms of a conventional loan.

How Are Business Notes Created?

The seller and buyer must agree on a price for the business, the terms of a payment plan and the interest that will be charged on the sale of the business.

A lawyer will draw up a series of documents that cover the specific details of the sale and payments. The end result is the business note.

Example of Items Addressed in a Business Note
  • Exactly which assets are being sold
  • Interest payments
  • Payment schedule
  • Sale price
  • What happens if the buyer misses a payment
  • When the final payment is due

What Is Seller Financing?

Seller financing — or owner financing — of a business is an agreement in which the seller extends a loan to the buyer that allows them to buy the business.

The buyer typically makes a substantial down payment, then pays the seller through a series of installments with interest.

The business note itself creates the legal structure and terms defining the sale.

Example of a Business Note

A typical business note will include the sale price, down payment, term of the note (how many years the buyer has to pay off the note), payment schedule and interest rate.

These vary based on the terms and conditions the business buyer and seller negotiate.

Business Note Example
NOTE ELEMENTAMOUNT
Total sales price $500,000
Down payment$100,000
Business note value$400,000
Term5 years
PaymentsMonthly
Interest rate7% APR

In this example scenario of a sale using a business note, the business buyer would make monthly payments of $7,920.48 each month for five years.

The total for those 60 payments would be $475,228.76 — meaning the seller, by extending owner financing, will earn $75,228.76 in interest payments over the term of the business note.

How Does Someone Benefit from a Business Note?

There are several benefits — for both the buyer and seller — of an owner-financed business sale through the use of a business note.

Benefits of Using a Business Note
SELLER’S BENEFITS BUYER’S BENEFITS
You get a tax advantage by accepting payments in installments rather than in one lump sum.You get better access to financing since owner-financed business notes don’t require the stringent requirements of a financial institution.
Because a business note allows you to sell to people who may not qualify for a conventional loan, you may have a larger pool of potential buyers.You are more likely able to negotiate the terms of the business note than you would be with a conventional loan.
You typically get a higher sales price — with interest. By avoiding high closing costs, the buyer is more inclined to accept the full sale price.You avoid many of the fees and closing costs associated with a traditional business loan.

Another benefit of a business note for the buyer is that the seller has a vested interest in the success of the new owner. A buyer may even negotiate with the seller into staying on as an advisor or consultant to make sure the business is successful — which also helps to ensure that they can pay off the financing.

Who Buys Business Notes?

If you were the seller of the business, you can sell your business note to a business note buyer or broker. These are investors who purchase business notes, loans and other types of financial agreements.

Business note buyers will buy a portion of or the entire business note. But they pay a discounted amount — typically 10% to 30% less than the face value of the note. These buyers also may require that a seller meet high standards before they will agree to purchase your business note.

Common Examples of Business Note Buyers’ Requirements
  • The term on the business note must fall within a specified amount of time, such as 5 years.
  • The note must be fully amortized. This means there are fixed monthly payments with no large balloon payments at the end of the note’s term.
  • Proof of business profitability and cash flow for the 12 months before the sale.
  • The buyer must have signed a personal guarantee and must have a good credit score.
  • The down payment on the note should be 20% to 30% of the note’s total — the lower the down payment, the higher your discount rate.
  • The note should be the first lien on the business — any other position makes it harder to sell your business note.
  • You must have received payments (or at least one payment) from the buyer before selling your business note to show the reliability of the buyer to make payments.
  • The note buyer may require a minimum interest rate on your business note.

The exact requirements vary depending on the business note buyer.

Business note buyers purchase notes in all industries. If the business is in an industry that tends to ride out economic downturns, you may have the best chance of selling your business note.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 14, 2022

3 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. American Institute of Certified Public Accountants. (2014). Form 1040 Reporting of Owner Financing & Nontraditional Loans (Installment Sales 101). Retrieved from https://www.irs.gov/pub/irs-utl/22-Installment%20Sales%20101.pdf
  2. Minnesota Department of Employment and Economic Development. (n.d.). Business Loan Agreements. Retrieved from https://mn.gov/deed/business/starting-business/finance-basics/loan-agreements.jsp
  3. U.S. Securities and Exchange Commission. (n.d.). Promissory Notes. Retrieved from https://www.investor.gov/protect-your-investments/fraud/types-fraud/promissory-notes