Timing differentiates profit and loss in the business of agriculture. One business owner may be scrambling for funds to buy ten thousand tonnes of maize before it is out of season, while another is raising money to pay farmers in advance before payment from international clients is received. Accessing finances in time to seize opportunities is a challenge that has plagued agro-industrial businesses in Nigeria. Bank loans remain an important source of funding, but that is changing due to the ongoing transformation of Nigeria’s agro-industrial sector.
The agro-industrial sector’s transformation is powered by an innovation in financing, in addition to technology, policy reforms, and an improved value chain. It was necessitated by the high interest rates and hurdles of traditional loans. Commercial papers are emerging as an alternative for eligible businesses. Previously considered a financial instrument for only large corporations and high-net-worth individuals, commercial papers have become an increasingly relevant financing option for creditworthy agro-industrial businesses looking to thrive in Nigeria.
The perfect tool for agro business cycles
Commercial papers are short-term, unsecured debt instruments issued by companies to raise funds directly from investors. They are issued at a discount and redeemed at face value, with maturity ranging from a few weeks to 270 days. Unlike traditional bank loans with long approval processes and rigid repayment structures, commercial papers can give eligible issuers access to capital and the flexibility to structure repayment according to their operational cycles.
This is valuable in the agro-industrial sector, where cash flow is not linear. Businesses incur substantial costs upfront for procurement, aggregation, transportation, etc., and may not realise revenue until months later. Commercial papers can be structured to sync with the business cycles of eligible agro businesses, removing liquidity pressure and improving cash flow.
However, commercial papers are not a replacement for traditional bank loans in every circumstance. The most appropriate financing option will depend on the nature of the business, its funding requirements, creditworthiness, cash flow profile, and the purpose and tenor of the financing required.
Lower costs, greater efficiency
The cost efficiency of commercial papers is one of its greatest selling points. Due to high interest rates, loans from banks can erode margins for agro businesses. This is in addition to profitability being vulnerable to inflation, fluctuating exchange rates, expensive logistics, etc.
Raising funds through commercial papers can provide eligible companies with access to competitive financing and help them optimise their funding costs. In the long term, this can improve profitability and productivity, aid expansion, and strengthen supply chains.
Commercial papers are in demand
Nigeria’s commercial paper market has been fortified with enhanced financial infrastructure and regulatory oversight by the Securities and Exchange Commission (SEC), and deepened market participation by institutions such as FMDQ Exchange.
Institutional investors and high-net-worth individuals are constantly exploring financial instruments with better returns. Commercial papers have become a great option and the rise in their adoption is fueled by this demand. This healthy demand creates a robust pool for issuers and fosters a mutually beneficial relationship between creditworthy companies in need of funds and investors that want stellar returns on investment.
However, accessing the commercial paper market directly is not an option available to every business. Issuers must meet applicable eligibility, credit, governance, and market requirements. This is where the expertise of merchant banks becomes critical. Merchant banks play an important role in helping eligible businesses assess their funding needs, structure commercial paper programmes, navigate the issuance process, and connect issuers with investors. For agro-industrial businesses seeking to explore this market, the right financial partner can therefore be as important as the instrument itself.
Strengthening the agro sector
As more eligible businesses in the agro sector leverage commercial papers to fund daily operations and expansion initiatives in commodity trading, food processing, and exporting, the broader agricultural ecosystem is strengthened. This is evident as businesses can pay farmers swiftly, invest in warehouses, pay for logistics seamlessly, and reduce post-harvest losses. The result is improved productivity and stronger value chains to support the nation’s food security goals.
Hurdles associated with commercial papers
Because commercial papers are unsecured, investors’ confidence rides on the financial strength and credibility of the issuing company. Businesses aiming to access the market must show strong fundamentals, sound governance practices, and a reassuring track record. These requirements can be a barrier to entry for smaller agro businesses.
Refinancing risk is another concern. Due to the short-term tenure of commercial papers, issuers must generate sufficient cash flow to meet maturing obligations or roll over their existing issuances. Market uncertainty or insufficient liquidity can make this tedious. This reinforces the importance of selecting the right funding structure. For some businesses, a combination of commercial papers, bank lending, and other capital-market solutions may provide a more appropriate and sustainable financing strategy than relying on a single source of funding.
The future is promising
The growing adoption of commercial papers represents a broader evolution in how agro-industrialists are approaching capital. As Nigeria diversifies its economy and explores the potential of agriculture, the need for efficient and sustainable financing solutions is pressing. Therefore, businesses in the sector will perpetually opt for solutions that move swiftly. With their flexibility, cost efficiency, and ability to sync with seasonal cash flows, commercial papers are positioned to meet this need for eligible issuers. Innovations like digital issuance platforms will make commercial papers more accessible within the agricultural sector.
More importantly, commercial papers should be viewed as part of a broader suite of financing solutions available to businesses. Depending on their specific needs and financial profile, agro-industrialists can explore a combination of traditional bank financing, commercial papers, and other capital-market solutions to create a funding structure that supports sustainable growth.
To learn more about Coronation Merchant Bank and our various solutions, visit www.coronationmb.com or call 0201-2797640 or 0201-2797641.
Uche Bosah, Group Head, Corporate Banking, Coronation Merchant Bank
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