Final answer:
Factoring a promissory note is the process of selling or transferring ownership of the note, while negotiating a promissory note involves modifying its terms. Both processes can be beneficial in different situations.
Step-by-step explanation:
Factoring a promissory note is the process of selling or transferring ownership of the note to another party. This allows the original lender to receive immediate payment for the note, rather than waiting for the borrower to repay the full amount. Factoring can be advantageous for lenders because it provides them with immediate cash flow, while the buyer of the note takes on the risk of collecting the repayment.
For example, let's say a company lends money to a borrower through a promissory note. However, the company needs immediate cash for its own operations, so it decides to factor the note. The company sells the note to a third-party buyer, who takes on the responsibility of collecting the repayment from the borrower.
In contrast, negotiating a promissory note involves reaching an agreement between the lender and the borrower to modify the terms of the note. This may include changing the interest rate, extending the repayment period, or adjusting the payment schedule. Negotiating a promissory note can be beneficial for borrowers who are struggling to meet their payment obligations.
For instance, let's say a borrower is having difficulty making the monthly payments on a promissory note. The borrower contacts the lender and explains the financial hardship they are facing. The lender agrees to negotiate the terms of the note by reducing the interest rate and extending the repayment period, making it more manageable for the borrower to fulfill their obligation.