Ron - no question a bad question... glad you asking!
There are most definitely lenders that will establish credit facilities collateralized by promissory notes. My primary credit facility prior the crash in 2008 was a rediscount facility with a lender out of the Philadelphia market (who is no longer lending in this space by the way).
I have received many inquiries from lenders looking to finance notes receivable for my company over recent months. I will need to go back and review my notes to recall names of those lenders. Typically they are not looking for one note here or there, but are instead looking to provide financing for a lender with a sizable portfolio.
That said, there are potentially private lenders in your market that would offer financing on your notes receivable, with your equity subordinate to their debt, or even in a pari passu arrangement (which means basically their loan is on a equal level with your cash in the deal - you share in upside and downside in the deal).
As an example, here is how our credit facility would work. We would fund the note, then the lender, upon receipt of a complete collateral package (note, recorded deed of trust, and an assignment of our security interest in the note, along with other collateral documentation) would advance 75% of the value of the note, freeing up our cash to make additional loans. We kept 25% skin in the game, and our equity was subordinate to the senior bank debt.
So here is the word of caution. Leverage is wonderful when the market is heading up - exponential impact on your return on equity. It will kill you when the market is heading down. Be very careful with leverage when financing notes receivable. When a market drops 30% and you are using debt to finance 75% of the note receivable, your equity is gone and you are upside down on the note.
Here are some things to think about related to leveraging notes receivable in a declining market, which will happen at some point - not a question of if, is a question of when. And no, I didn't read this - learned from the school of hard knocks.
Your borrower, just like you, will be facing issues, from cash flow challenges to the declining value of their asset. They will chose not to pay your interest due (and will very will pay themselves instead) and will force you to make a move to take control of the asset.
As the lender, you have limited options to control the cash flows from the asset collateralizing the note. All are painful to execute (from a deed in Lieu to a full foreclosure, pursuing personal guarantors - none are without pain), and all will cost you time and money. In the meantime, your cash flow stops (because your borrower stops paying you and starts paying themselves) and your lender still wants to get paid. So be careful if you do pursue this route.
Would I use leverage again to finance our notes receivable? I have strongly considered it, but at very conservative leverage ratios, and only in a manner in which I take a very cautious view of the potential what ifs on the horizon. Massive gains utilizing leverage can be wiped out quickly in a declining market. Explore it, consider it strongly, but proceed with caution.
