• Thursday, March 28, 2024
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What you should know about commercial papers as an alternative source of funding

commercial papers

For mid-level organisations across different industries, one financial instrument that has not received much attention in terms of direct funding required for working capital funding, are Commercial Papers. This is because such organisations have not explored the possibilities of accessing commercial papers and this is due to a lack of awareness of its numerous benefits when it comes to raising funds.

With the right financial advisory, these organisations can easily finance day to day short term expenditures by investing in Commercial papers. “CPs” as they are often called, provides a cheaper source of funding in comparison to other securities.

In very simple terms, Commercial Papers are short-term debt financing securities with a 3 to 9 months maturity period. They usually consist of discounted promissory notes issued by large corporations with good credit ratings. Commercial papers are typically for working capital, and are generic, with a structure that allows for ease of investment and exits via a recognised exchange. These financial instruments are open to all kinds of investors, ranging from individuals to financial institutions such as banks, asset managers, trustees and corporate treasuries.

A total of N505.30 billion was raised in 2018 through CPs programmes by various corporates, representing 231.8 percent rise over the N152.35 billion recorded in 2017.

There were a total of 60 CPs quotations on the FMDQ OTC Securities Exchange in 2018 against 33 CPs quotations in the previous year.

Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), at July 2018 Monetary Policy Committee (MPC) meeting urged the large corporate to issue commercial paper notes to boost credit to the real economy at lower rate.

Issuing commercial paper notes is beneficial to an investor as it provides attractive investment opportunities. Commercial papers are cheaper than bank loans.

So what makes Commercial Papers an alternative source of cheap funding?

Issued at a discount: Commercial Papers are issued at a discount which means the demands for periodic interest payments have been eliminated in preference for single payment at maturity. This helps firms manage their cash flows.

Lower Interest Rate: Commercial papers are issued at lower lending rates than what is obtained from commercial banks. This makes it less expensive for firms and businesses to run their operations and can quickly meet short-term or working capital funding at relatively cheaper rates.

Funding from the Capital Market: This makes it a less expensive source of funding as the capital market is more liquid compared to other sources of short term funding.

For Issuing Houses like FBNQuest Merchant Bank, providing advisory for organisations who require such funding is at the core of its investment banking division. It is important for such organisations to seek the right type of advisory when looking to invest in commercial papers.

The process of issuance of CPs, is straightforward with a detailed step by step approach, documentation and guidance from the issuing house. For investors, FBNQuest helps with the application process, deposit with the CSCS (Central Securities Clearing System) and payment to the investors at maturity.

Investors are urged to contact FBNQuest Merchant Bank at Fbnquest.com/merchantbank to find out more on how to invest in Commercial papers.