What is Commercial Paper and how to invest?
Discover what Commercial Paper is and how it works!
Announcements
Although commercial paper is not the most common option when we think about investments, it is frequently seen in the global financial market.
And that is why anyone who intends to invest in commercial paper, which is usually offered on the secondary market, must understand its main concept.
And if you want to know more about the subject, keep reading. We'll explain how it all works!
What is commercial paper?
Commercial Paper, issued by public or private companies, is a short-term debt security, also known as an unsecured promissory note.
This is because it concerns a security in the form of a promissory note, with exclusive characteristics and which does not present a guarantee.
Typically, these loans are used for one-off expenses, such as payroll. In other words, the objective is to solve an immediate need for working capital.
Financing is short-term. For privately held companies, it is 180 days. For publicly held companies, it is 360 days.
How do commercial papers work?
The company seeking financing in the form of commercial papers issues a security and offers it to the investor.
This title, offered at a discount, will be purchased again at its original price.
Commercial paper offers the holder of the debt security the right to credit against the company in question.
This means that in practice, the investor is lending his money to the company when purchasing the promissory note.
This instrument, from a financial point of view for companies, is very attractive, as it helps to increase working capital and thus maintain the continuity of operations.
Who can issue commercial papers?
Generally speaking, almost all companies can issue commercial papers.
There are no restrictions regarding the size of the company, as any company can submit an issuance order, as long as they are public limited companies (open or closed) and are not of a financial nature, such as:
• Banks;
• Brokers;
• Leasing companies;
• Securities distribution companies;
• Brokerage firms and other financial institutions.
In this list, we show the companies that CANNOT issue commercial papers.
How to issue commercial papers?
The commercial promissory note or security in the form of commercial paper works in a similar way to debentures and CDB (Bank Deposit Certificate).
But it is important to mention that in this case, there is no guarantee from the FGC (Credit Guarantee Fund), which is what happens with the CDB.
Debentures also do not have this guarantee.
This means that if something happens, there is no guarantee that the amount in question will be refunded.
For companies to issue these notes, it is necessary to obtain registration with the CVM (Securities and Exchange Commission) and choose a financial institution, which will coordinate the issuance of the title.
Commercial Paper can be prefixed or post-fixed.
To carry out the issuance, it is necessary to consider some factors, such as, for example, duration of the title, conditions, guarantees, among others.
Issuing commercial papers presents a cost to the company, which is lower than that of a traditional loan.
In addition to paying the promised income to the investor, there is an issuance fee with the CVM, which is 0.4% of the value of the security.
It may also be necessary to take into account the cost of publications.
How to invest in commercial promissory notes?
It is common for the promissory note to be classified as a credit instrument, acting as a loan that companies take from investors.
For this reason, anyone wishing to purchase commercial papers needs to look for options on the secondary market or through investment funds.
It is possible to transfer ownership of the commercial paper. However, in this case, an endorsement is required and the company in question cannot have a debt ratio that is considered bad.
Also, if you want to dispose of the bond early, remember that there is no guarantee of return as the bond will be subject to market conditions at that time.
What is the profitability of these bonds?
Remuneration varies depending on the organization and grade.
The profitability of these securities can be fixed or post-fixed.
Most of the time, the remuneration is post-fixed and linked to an index, which can be:
• Selic rate (the basic interest rate of the economy)
• Interbank Deposit Certificate (CDI)
• General Price Index – Market (IGP-M)
• Broad Consumer Price Index (IPCA)
What is your taxation?
It is important to remember that the taxation of commercial promissory notes follows the regressive Income Tax (IR) table:
• 22.5% for operations with a maximum of 180 days
• 20% for operations between 181 and 360 days
• 17.5% for special cases where the note had a duration of up to 720 days
• 15% for operations from 721 days
What are the main advantages of commercial papers?
The main advantages include:
- Liquidity
• Attractive profitability
• Promise of payment to the investor (with the established bonus)
• Regulated by law and subject to legal action
• It is a way to support the company's growth
• Possibility of diversifying short-term investments
• The company and the investor can enter into an agreement to define terms and interest (although this is not standard)
What are the main disadvantages of commercial papers?
There are also some disadvantages to this type of investment. And if you are interested in commercial papers, you need to know what these disadvantages are. Take a look:
• Lack of investor protection
• Presents high risks
• Difficulty for regulatory bodies to control the circulation of this title
• Once the commercial paper reaches maturity, there is no way to postpone it.
Conclusion
Now you know what commercial papers or commercial promissory notes are, how they work, how to invest and the main advantages!
Despite being a considerable risk investment, commercial papers offer more interesting returns than government bonds!
For this reason, before making a decision, make a detailed analysis of the earnings and other forms of investment available.
