What Is a Cash Flow Note?
Popular finance texts--print, broadcast and online--are littered with the term "cash flow note" and many an infomercial touts them as the key to your financial success. Despite the prevalence of the term, a precise understanding of cash flow notes remains elusive despite an intuitively simple title. What are cash flow notes, what are their uses and why are they important?
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Definition
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Cash flow notes are promissory notes--instruments that entitle the owner to a stream of periodic payments from a third party. Cash flow notes may be secured by real property, as in the case of mortgage notes, and car, automobile or boat loans. They also might be annuity payments used to pay the victim of a lawsuit. There are also business cash flow notes, which are secured against a business's assets.
Usage of the Phrase
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The phrase "cash flow note," popularized by financial guru Robert Kiyosaki among others, is used when an individual or business purchases a transferable note--a note that allows the purchaser to legally assume the rights of payment as well as other associated rights to another for consideration--as an investment.
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Investing in Cash Flow Notes
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An investor may buy a cash flow note for less than the current value of future payments. For example, an individual may buy a cash flow note with a period of 60 months and payments of $1,000 a month for $45,000 dollars.
The investor may buy the cash flow note at a discount because she is seeking stable future income. She may also buy the cash flow note in the hope of reselling it for a premium to another who is seeking stable income. A third reason for purchasing cash flow notes is currency speculation: an investor may believe that the purchasing power of the dollar will strengthen over time, making the cash flow notes' future payments more valuable.
Investing Considerations
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Any investor considering buying a cash flow note must make a careful appraisal of the ability of the debtor to pay. Regardless of a debtor's legal obligation to pay, the cash flow note is worthless if the debtor is a credit risk or his financial situation leads him to be delinquent. Also, the ability to liquidate the note quickly cannot be overestimated, as the investor's own fortunes might take a turn for the worse.
How to Invest in Cash Flow Notes
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There are a number of businesses which advertise online and on infomercials that purport to teach the secrets to getting rich through cash flow notes for a fee. Check with the Better Business Bureau before committing any funds to these businesses. If you are interested in investing in cash flow notes, you are better off checking with the Certified Financial Planner Board of Standards Inc. (see Resources) for a fee-only certified investment planner specializing in cash flow notes.
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