A payoff and a buyout are not the same transaction

A payoff removes an obligation from your balance sheet using money that comes from somewhere else — your own cash, a bank facility, a sale. A buyout does not remove anything. It moves the obligation into a bigger one and charges you a second time for the privilege.

Both end with the first funder paid and its UCC-1 terminated. That is where the similarity stops.

Where the money comes from, and what it costs

In a payoff, the cost of clearing the position is whatever the payoff quote says. If the quote is $50,400 and you wire $50,400, the transaction cost you $50,400.

In a buyout, the incoming funder advances an amount that covers the old position and hands you some additional cash. The whole advanced amount — old position plus new cash — is priced at the new deal's factor rate or interest rate. The dollars used to clear the old position are treated exactly like the dollars you put in your pocket.

• Total repayment on the new deal: $80,400 × 1.45 = $116,580
• Cost attributable to the bought-out portion: $50,400 × 0.45 = $22,680
• Cost attributable to the new cash: $30,000 × 0.45 = $13,500
• Cash that actually reaches your account: $30,000
• Increase in what you owe: $116,580 − $50,400 = $66,180

You received $30,000 and your total obligation rose by $66,180. That is $2.21 of new obligation for every $1.00 of new cash, and the reason is the $22,680 — a cost charged on money that was already cost, not capital.

Compare the alternative: pay the $50,400 off from operating cash or a cheaper facility, then separately raise $30,000. The $30,000 would still cost $13,500 at the same factor, but the $22,680 never happens.

The one number that tells you which you are being offered

Ask for the net funding breakdown and look for a line called something like "payoff to prior funder", "buyout of position one", or "disbursement to third party". If that line exists and is more than zero, it is a buyout, whatever the term sheet calls it.

Then compute the ratio above: (new total repayment − old remaining balance) ÷ cash you actually receive. In the example it is 2.21. Anything approaching or exceeding 2 means most of what you are paying for is not capital.

Why a buyout is still sometimes the right transaction

It is not automatically a bad deal, and saying so would be dishonest. Three situations where it can be the correct call.

The questions that settle it

1. What is the exact payoff figure being sent to the prior funder, and who is sending it — the new funder directly, or you?
2. What is the net cash to me after every fee?
3. What is the new total repayment amount, and over how many payments?
4. What is the new per-day or per-week remittance, and what is the current one?
5. If I instead paid the old position off over its remaining term and took no new money, what would my total outlay be?

Question five is the control. In the example, running the old deal to term costs $50,400 more in total. The buyout costs $116,580 more in total and hands you $30,000. Whether $66,180 is a fair price for $30,000 plus $252 a day of breathing room is a judgement about your business — but it should be made with that figure written down, not with a monthly payment quoted at you.

What to do before signing

Get the prior funder's payoff letter yourself rather than relying on the new funder's estimate, so the bought-out amount is a verified number and not a placeholder. Require in writing that the payoff goes directly to the prior funder and that the prior funder's termination is a condition of the closing. Ask whether the new agreement contains its own anti-stacking language, because a buyout usually tightens it. And confirm whether your personal guarantee on the old deal is discharged by payment or needs a written release.

What each document actually does depends on its exact terms and on the state law it selects. Treat this as a map of the mechanics, not as legal advice.