Modern agribusiness can use various financial instruments in its activities, not only traditional bank loans. In particular, guaranteed promissory notes. In agribusiness, they are usually written out as payment for seeds, pesticides and fertilizers delivered by the distributor. The mechanism of work is quite simple: in the spring, with the help of a promissory note validated in one of the banks, the company finances 100% of the cost of goods and material values, and in the fall – it is settled for them. Over the past few years, the market of valued promissory notes in Ukraine is estimated at 5 billion UAH, which confirms the demand for this banking service. Using our own example, we would like to talk about the possibilities and advantages of guaranteed promissory notes.
Guaranteed promissory notes VS loans
Why did Ristone Holdings start using promissory notes? Isn’t traditional lending more profitable? According to Vadym Nesterenko, the founder and chairman of the supervisory board of Ristone Holdings, a guaranteed promissory note is a cheaper banking instrument compared to classic lending. And saving money on the maintenance of the involved resources is an important advantage for any business. Rates for avalation of promissory notes usually vary from 2 to 4.5% per annum.
Sell products when it is profitable
Another advantage of a promissory note is that it allows you to sell products during the period of the highest prices for them, after receiving a payment delay from the supplier of the goods. According to Vadym Nesterenko, this is very important for the agro-industrial complex with its long production cycles. Also, the use of a certified promissory note confirms the reliability of the holding’s business reputation. After all, if a solid financial institution is ready to vouch for its financial obligations, this is a clear indicator that the holding is successful and solvent.
“The specific reasons for turning to these securities are the leveling of currency risks, which are a significant factor for agro-industrial complex enterprises, and the possibility of using a financial instrument at a low cost of service. In general, avalorized promissory notes give an opportunity to sell your products in the period of the most favorable price offer,” explains Vadym Nesterenko.
Leveling of exchange rate risks
A promissory note denominated in hryvnia, in contrast to a foreign currency bank loan or a supplier’s commodity loan, mostly pegged to the dollar, does not carry exchange rate risks at the time of its repayment.
“The exchange rate is fixed at the time of the first payment. This allows you to avoid additional costs due to a possible increase in the exchange rate at the time of final settlement. I do not find any disadvantages of using a promissory note with aval. On the contrary, I see it as a rather effective tool not only from the point of view of financial and economic activity, but also from the point of view of forming the holding’s reputation as a reliable, responsible and solvent partner. — explains the founder and chairman of the supervisory board of Ristone Holdings. – For the supplier of goods, a certified promissory note is a reliable tool for ensuring payment. Due to the bank guarantee, there is no risk of non-payment for already shipped goods, even in case of any temporary unfavorable market situation. Another advantage of the supplier is the ability to use the promissory note for further settlement of obligations. Therefore, promissory notes endorsed by a banking institution are a mutually convenient and reliable settlement tool, so the distributors do not make specific demands regarding the amounts. At least in our practice, this did not happen,” explains the founder and chairman of the supervisory board of Ristone Holdings.
Agroholding actively uses this financial instrument in its activities and has already managed to assess its advantages: it is an opportunity to save working capital, get more income from the sale of its products, and protect itself from currency jumps. In addition, this is an important reputational step that demonstrates the reliability of the company to its current and potential partners, investors.