Beyond Bank Loans: Is Commercial Paper Right For Your Business?

Beyond Bank Loans: Is Commercial Paper Right for Your Business?

When a business needs money, a bank loan is often one of the first options that comes to mind. But it isn’t the only way to raise funds.

Some companies raise money directly from investors through commercial paper, a short-term borrowing option designed to meet specific funding needs.

United Nigeria Airlines recently announced plans to raise up to ₦20 billion under its ₦100 billion commercial paper programme. The proposed issuance has two series, with tenors of 270 and 364 days, and the funds are intended to support working capital.

This raises an important question for other businesses: could commercial paper be a suitable funding option for them too?

Let’s take a closer look.

What Exactly Is Commercial Paper?

To put it simply, commercial paper allows a company to borrow money from investors for a short period, with an agreement to repay the money and the agreed return at a specified date.

One thing worth noting is that the company doesn’t have to give up ownership to raise the funds. Unlike equity financing, investors do not receive a stake in the business simply because they invest in its commercial paper.

However, the money still has to be repaid. And that is where careful planning becomes important.

Why Would a Business Consider It?

Think about a company that has orders to fulfil, suppliers to pay and staff salaries to cover, but some of its customers haven’t paid their invoices yet.

The business may be doing well, but it still needs cash to keep things moving.

For an eligible company in this position, commercial paper could provide the short-term funding needed to manage those expenses while waiting for money to come in.

It can also give businesses another source of funding beyond traditional bank loans and overdrafts.

But here’s the thing: having access to funding doesn’t automatically mean it’s the right funding for your business. What matters is whether the money meets your needs and whether you can comfortably repay it.

Before You Borrow, Ask Yourself One Question: Can You Repay on Time?

This is probably the most important thing to consider.

Commercial paper has a maturity date, and the company must be ready to meet its repayment obligations when that date arrives.

Let’s say your business expects customers to settle outstanding invoices within the next few months. Short-term funding might make sense, provided those expected payments are realistic and sufficient to cover your obligations.

Now imagine using the same type of funding for a project that won’t start generating revenue for another two or three years. You could find yourself having to repay investors long before the project begins to pay off.

That is a risk worth thinking about before committing to any funding arrangement.

Look closely at your expected cash inflows, allow for possible delays and consider what you would do if things don’t go according to plan.

A good funding decision should help your business move forward, not leave it struggling to meet its next repayment.

Four Things to Consider Before Issuing Commercial Paper

1. What will it actually cost?

The amount you repay isn’t the only cost to consider. There may also be arrangement fees, professional fees and other transaction expenses.

Before deciding, compare the total cost with other available options. A funding arrangement may look attractive at first but become less appealing when all the costs are included.

2. Does the repayment period fit your business?

Think about when the money will be needed and, more importantly, when your business expects to generate enough cash to repay it.

The repayment date should make sense for your cash flow, not just for your immediate funding needs.

3. Is your business financially ready?

Investors will want to understand the company they are lending to. Its financial performance, existing debts, available cash and quality of financial records can all influence how attractive the issuance is to investors.

If your financial records are incomplete or your cash flow is difficult to predict, it may be worth addressing those issues before approaching the market.

4. Do you understand the process?

Commercial paper issuance involves documentation and applicable regulatory and market requirements in Nigeria. Depending on the structure and issuance route, businesses may need credit assessment or rating, transaction professionals and compliance with relevant SEC and FMDQ requirements.

These details should be confirmed for the proposed issuance before proceeding. Working with experienced advisers can help you understand what is required and whether your business is ready.

Ultimately, raising money is only one part of the decision. You also need to understand the cost, the obligations and how the funding fits into your wider business plans.

What If You’re the Investor?

Commercial paper can also offer investors an opportunity to earn returns by lending to companies. But it’s important to understand what you’re getting into.

Unlike government securities, commercial paper exposes you to the credit risk of the company issuing it. If the company experiences financial difficulties, it may struggle to repay investors as agreed.

A credit rating, where available, can help you assess that risk, but it doesn’t guarantee that you will get your money back.

Before investing, take time to understand the company’s financial position, the terms of the offer and when your money is due to be repaid. Also, consider whether you can afford to keep those funds invested until maturity.

And don’t let an attractive return be the only thing guiding your decision. It’s just as important to understand the risks you’re taking to earn it.

The End2End Perspective

Commercial paper can be useful for businesses that need short-term funding, but it isn’t a solution for every financial challenge.

A company that chooses the wrong funding structure may find itself under pressure even after successfully raising the money it needs.

At End2End Advisory, we believe businesses should look beyond the amount they want to raise and consider what the funding will mean for them in the months ahead. That includes understanding their cash flow, comparing available financing options and choosing a structure that works for both their immediate needs and their long-term plans.

Because the goal isn’t simply to raise capital. It’s to raise it in a way your business can sustain.

Considering funding options for your business?

Speak with End2End Advisory to explore financing structures that align with your business needs, financial position and growth plans.