The Discount Note and Cash Flow Industry is a very popular industry with a rich history. Historically, those involved with the industry have always included those that broker private mortgage promissory notes and 99% of the time, the notes are purchased at a discount to face value. Those involved in the mortgage note industry realized that other passive income streams also had the ability to be purchased at a discount. Taken on the whole, the traditional mortgage notes plus the other discovered income streams make up the products of the Cash Flow Industry.
The Discount Mortgage Note Industry
The business of purchasing, selling, or brokering discount notes is actually just one integral component of a much broader industry commonly referred to as the “paper industry“. The paper in the paper industry most often involves various types of debt obligations or I.O.U.s. Such debt obligations can be between two people, a person and a business, or between two businesses. The total size of the paper industry is enormous and dwarfs the traditional lending industry (banking). Those that practice in the industry do so by:
- Investing in one or more of the various financial components of the industry.
- Brokering a financial instrument to an industry lender of funding source for a fee.
- Acting as a business consultant for a flat fee or hourly charge.
The Cash Flow Industry
The “Cash Flow Industry” is a colloquial name given to the paper industry that generally deals with the buying, selling or brokering of certain consumer generated and commercially generated debt instruments in the secondary financial markets. The industry is called cash flow because it most often involves the purchase or brokering of debt obligations in some form that include an income stream. In some cases, the income stream is contractually inherent such as the interest paid on a promissory note. In other instances the income stream is created by purchasing a financial obligation at a discount to its face value.
There are literally dozens of financial obligations that are periodically included in any formal registry of prospective “cash flow” opportunities. In general, they will fit into two broad categories:
▪ Consumer Obligations…to include obligations payable by an individual to another individual or business entity.
▪ Commercial Obligations…business to business obligations to also include governmental obligations
The Common Thread
Regardless of whether a particular paper industry obligation is consumer-based or commercial based, most have a common thread that qualifies them for inclusion in this unique arena of investment opportunity.
- First, all “paper industry” obligations represent some form of debt that is payable to the holder at a future date
- Second, the holders or beneficiaries of these obligations may periodically desire to sell them for immediate payment rather than waiting a given time for their maturity and future date payment.
The opportunity then presents itself to industry consultants or “brokers” to refer or become an intermediary between the owner of the debt instrument and an appropriate investment company. In some instances, these broker / consultants will purchase the debt instruments for their own investment portfolios due to the relatively high yields they may offer.
Discounting
One of the most important concepts for investors to grasp regarding the various forms of promissory obligations available in the paper industry is the opportunity to discount or to purchase that paper at less than its true face value. Since the vast majority of industry paper has a payment stream that is contractually fixed, discounting or paying less for that fixed income stream can raise the investment yield substantially. It is clear to see, for example, that a $1,000 obligation that pays $100 per year will yield 10% to the investor. If the obligation was discounted and purchased at 75% of its face value or $750 yet still received the $100 per year payment stream, the investment yield would be slightly in excess of 13%…a significantly higher yield than the original 10%.
The discount that can be successfully negotiated between buyer and seller depends on many variables such as the motivation of the seller, the buyer’s desired yield, the security provided by the collateral, and the current interest available on other investments.
