Short-Term Notes

Short term notes are debt securities with a maturity of one year or less. They are issued by borrowers who need short-term financing and are typically used for working capital, inventory purchases, or to bridge gaps in cash flow. Short term notes can be a good investment option for investors who are looking for short-term, fixed-income opportunities with relatively low risk.

Real estate notes are created when a property buyer finances the purchase of their property through a mortgage loan. The mortgage note is then sold to an investor, and the proceeds from the sale are used to fund the loan. The investor becomes the lender, and the property owner becomes the borrower.  

Investors can purchase two types of real estate notes: performing and non-performing. Performing notes are mortgage loans that the borrower is current on, meaning they are making their monthly payments on time. Non-performing notes are loans where the borrower has fallen behind on their payments and is at risk of defaulting on the loan.

A performing note offers a lower risk for mortgage note investing because investors know that the borrower has been making their monthly payments. However, a non-performing note sometimes offers a higher potential return on investment because the investor can foreclose on the property and take ownership if the borrower defaults on the loan.

Real estate notes can be recorded in either first or second position. A first position lien mortgage note is a loan secured by the borrower's property. The lender has the first claim to the property if the borrower defaults on the loan.

A second position lien mortgage note is a loan that is subordinate to another loan. This means that if the borrower defaults on the loan, the lender of the second position lien mortgage will only be able to collect payment after the lender of the first position lien mortgage has been paid in full.

When it comes to potential risk and reward, investing in a first position mortgage note is generally seen as less risky than investing in a second position mortgage note. The lender is first in line to receive payments if the borrower defaults on the loan, which means there is a lower chance of the investor losing money. However, this also means that the potential return on investment is usually lower than with a second-position mortgage note.

Mortgage notes come in two main varieties: long-term and short-term.

Long-term mortgage notes are typically used for financing primary residences or other properties that will be held for a longer period of time. The risks associated with long-term mortgage notes are generally lower than those associated with short-term mortgage notes, but the potential rewards are also typically lower. However, long-term mortgage notes can still be a profitable investment for investors willing to wait for a longer period to see their return on investment.

Short-term mortgage notes are typically used for investment properties such as fix-and-flips or other quick turnaround projects. The most significant risk with short-term mortgage notes is that the borrower may default on the loan before selling the property, resulting in the investor losing their investment. However, the potential rewards are also high, as investors can earn a substantial return on their investment if the project is successful.

Short-term paper refers broadly to fixed-income securities that typically have original maturities of less than nine months. Short-term paper is usually issued at a discount and provides a relatively low-risk financing alternative for companies, governments, or other organizations to fund normal operations.

Short-term notes (the "paper") are negotiable debt instruments that are usually unsecured, but which may also be backed by assets such as securities or loans issued by a corporation. These financial instruments are sometimes considered part of the money market and are almost always issued at a discount to par and then repaid at face value upon maturity.

The difference between the purchase price and the face value of the security represents the return on investment for the holders. For the issuer, this difference represents the cost of financing the loan security. The debt security can also be issued as an interest-bearing security.

Examples of short-term paper include U.S. Treasury bills and negotiable instruments issued by financial institutions and corporations, such as commercial paper, promissory notes, mortgage notes, and bills of exchange.

Short-term notes are usually issued with a minimum denomination of $25,000. This means that the main investors of these securities are institutional investors who seek short-term vehicles to deposit their cash temporarily.

Given that short-term notes are a better alternative to holding cash in a bank account because they provided a return as opposed to cash, investors find them an attractive opportunity. Mutual funds, for instance, invest heavily in short-term paper due to their relative safety and high liquidity.

The majority of financial institutions rely on being able to roll over short-term paper for their day-to-day financing needs. During the U.S. financial-market meltdown of 2008, institutions essentially halted issuing short-term paper and the U.S. government had to intervene to provide liquidity for corporations caught without the means to finance operations.

Short-term paper is issued by a variety of entities, including governments, corporations, and financial institutions as they are a common form of financing the daily operations of any entity. It is a simpler form of financing than having to obtain a loan from a bank, for example. They are also easy to set up and don't require much information to be disclosed.

The issued paper is rated by a rating agency, such as Standard & Poor's, so investors understand the risk of the entity they are purchasing the short-term paper from.

Structured investment vehicles (SIV) that invest in long-term assets finance those assets by selling short-term paper with an average maturity of 90 days or less. The paper can be backed by a pool of mortgages or loans used for collateral and is, hence, referred to as short-term asset-backed paper. In the case of default, investors of the asset-backed paper can seize and sell the underlying collateral assets.

Commercial paper is a commonly used type of unsecured, short-term note issued by corporations, typically used for the financing of payroll, accounts payable, and inventories, as well as meeting other near-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days. Commercial paper is usually issued in larger denominations, typically $100,000.

It is not uncommon for issuers to adjust the amounts and/or the maturities of papers to suit the investment needs of a particular buyer or group of buyers. Investors can purchase short-term paper directly from the issuer or through dealers who act as intermediaries between the issuer and the lender.