Be a Loan Note Broker

This type of broker is the go-between for businesses who need additional cash flow with high amounts of outstanding invoices and investors looking for innovative places to put their money. Loan note brokers are much like mortgage brokers in that they do not actually buy the notes, but connect buyers and sellers in an effort to improve cash flow for a business. The work is difficult and requires a significant amount of time and energy, as well as many connections in both the business and investor world. However, it is possible to have success being a loan note broker by following the right steps.

Steps

Preparing Yourself for the Work

  1. Gain the requisite education. Loan note brokering is not an easy business. It requires significant networking and a strong knowledge of the financial world. Therefore, it is suggested that anyone desiring to get into this business take college-level finance courses to get a working knowledge of loans and investing before working as a loan note broker.
    • Working for a brokerage firm is another way to get hands-on experience and gain the required skills.
    • Often, loan note brokers are former real estate investors who no longer wish to deal with the problems associated with property management.
    • While some college courses are recommended, check with your state to see the requirements for being licensed (if any). New Jersey, for example, only requires a high school education.
  2. Learn financial calculation skills. A loan note broker should know how to calculate important financial metrics such as the Internal Rate of Return (IRR) and Net Present Value (NPV). They should be familiar with using a spreadsheet program or a calculator to quickly find these values and others. Brokers should also be familiar with the note brokering-specific financial terms like Loan to Value (LTV) and Investment to Value (ITV).[1]
  3. Familiarize yourself the terminology used in note brokering. You will have to know things like the difference between yield and interest rate and the differences between discount and yield. In fact, you will have to be able to calculate many types of yield to give informed information regarding returns on investment and what the seller can expect to receive in cash. You'll also have to know all of the different types of notes and the terms involved with the closing process.[2]
  4. Take a note brokering course. Note brokering is a complicated process with many different parts, variations, calculations, and terms. The only way to get the right knowledge to operate as a successful note broker is to take a course dedicated to the subject. Be warned, however, that many sites that claim to teach note brokering are just scams intended to make money for their founders. Look for courses and sites with positive reviews by searching for them online.
    • Look for courses from respected, successful brokers. Watch for excessively expensive courses or those that make you work through them to buy notes.[3]

Working as a Loan Note Broker

  1. Get licensed. Many states have very strict rules and guidelines for any type of financial brokering business. Be sure to check with your state to determine what licenses and training are required in order to become a loan note broker. Some states may require that note brokers also be licensed as securities broker-dealers.[4]
  2. Start your business. Secure licenses required by your state for starting a loan note brokerage. Loan note brokers who start their own company may be required to form a corporation, purchase bonding insurance, and open an escrow account. Any corporation formed must register with the state in which it is formed and pay an incorporation fee.
  3. Find sellers of notes. Your notes will be sourced from financial institutions, companies, and individuals. In order to buy those notes, though, you will need to locate sellers, build a working relationship with them, and then negotiate the sale of the notes. You'll want to look for entities that sell a large amount of nonperforming notes, write off a large amount of debt regularly, or have flow issues and are in need of capital. This will allow you to get a good price for your buyer.[5]
  4. Locate buyers. Locating buyers is similar to finding sellers. You will need to develop relationships with buyers over time to build trust and negotiate larger sales. Try starting with institutional buyers, like banks and investment funds, first before venturing into private buyers, as they are more aware of the note brokering process.[6]
  5. Facilitate the transaction. The role of the note broker is to initiate and facilitate the transaction between the seller and buyer of the note. Each transaction will vary based on the nature of both parties and the note itself. Many times, however, the note will be bought on a ten-day option, so that the buyer has ten days to investigate the note and the seller. Try to negotiate an agreement that works out in the mutual benefit of both sides so that you can earn their future business.[7]
  6. Collect your commission. As a note broker, you make money by charging a commission on the value of each note transaction. The commission is generally around 3 to 5 percent of the note value. However, your commission percentage may go down as the note value goes up. This commission is negotiable and should be established in the transaction documents.[8]

Advancing Your Career

  1. Develop excellent negotiation and marketing skills. Credibility is the key to success in the loan note broker business. If you do not appear trustworthy, investors will not be willing to purchase loan notes from you. You should also develop keen listening skills to better serve your clients and build connections.[9]
  2. Market your services. Plan an aggressive advertising campaign to locate businesses seeking additional cash flow as well as investors who are interested in purchasing loan notes as an investment. The best way to advertise is by building on your own background, techniques and experiences. Have a coherent, well-thought out advertising plan that is professional and instills confidence in both the investor and the seller.[10]
    • For example, you might consider a direct-mail campaign to attract potential buyers and sellers.[11]
  3. Make the move to full-time. At first, your broker transactions will only happen occasionally, as you spend most of your time seeking buyers and sellers. Eventually, however, your career will gain momentum such that you will be doing as much as several deals per week and earning a steady income. At this point, you can finally quit your day job and become a full-time note broker.[12]
  4. Consider becoming an investor. As note brokering becomes increasingly lucrative for you, you may be able to save enough money to actually purchase notes yourself. Your experience to this point will have provided you with a good idea of what constitutes a good note investment. In addition, you will be able to find good deals from your sellers and cut out the middle man by acting as your own broker.[13]

Related Articles

References

  1. ↑ http://noteinvestor.com/notes-101/what-is-ltv-and-itv/
  2. ↑ http://noteinvestor.com/note-broker-training/
  3. ↑ http://noteinvestor.com/note-broker-training/
  4. ↑ http://www.securities.utah.gov/docs/letters_notebroker.pdf
  5. ↑ https://www.distressedpro.com/non-performing-loans/
  6. ↑ http://noteinvestor.com/note-broker-training/
  7. ↑ http://www.eagletraders.com/advice/securities/note_brokers.php
  8. ↑ https://www.distressedpro.com/non-performing-loans/
  9. ↑ http://www.noteworthyusa.com/what-is-a-note-broker/
  10. ↑ http://papersourceonline.com/faqs/
  11. ↑ http://www.noteworthyusa.com/what-is-a-note-broker/
  12. ↑ http://papersourceonline.com/faqs/
  13. ↑ http://noteinvestor.com/note-broker-training/
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