Promissory note accounting represents a form corporate financing provided by bank through purchase of promissory notes prior to their maturity date at discounted price for cash to derive profit from redeeming promissory notes at full price. Promissory note accounting is a credit operation. By accounting promissory notes, bank offers the promissory note holder a term loan.
Loans in the promissory note accounting form are provided by transferring the amount due to the promissory note holder to the holder’s current account within the timeframe stipulated in the promissory note accounting agreement.
One of the varieties of promissory note accounting is non-recourse accounting and reverse accounting, which differ from regular accounting by the procedure of scope of responsibility of promissory note holder.
Regular promissory note accounting means form of accounting whereby the outstanding loan amount owed by the holder’s is equal to the full promissory note amount (nominal value plus amount of interest on interest-bearing promissory notes), because in the event of the issuer’s failure to settle the promissory note the holder will have to pay the Bank the full promissory note amount under the promissory note accounting agreement.
Advantages for promissory note holders (goods buyers):
- deferment of payment for goods purchased through issuance of a promissory note without diverting current funds;
- possibility of documenting the pledge by one of the counteragents or by both parties;
- saving on costs in the event of early redemption of promissory note (by redeeming at the price below the nominal value).
Advantages for promissory note holders (goods sellers):
- prompt payment for goods shipped.
Reverse promissory note accounting means form of accounting whereby the promissory note holder promises the Bank to buy out the accounted promissory notes before their maturity date.
Advantages for promissory note issuers (goods buyers):
- deferment of payment for goods supplied through issuance of a promissory note without diverting current funds;
- the pledge is documented by the counteragent – goods seller.
Advantages for promissory note holders (goods sellers):
- opportunity to temporarily increase current funds by selling a Bank’s promissory note for a specific term.
Non-recourse promissory note accounting: under an accounting agreement, the holder is not responsible for paying full price for the promissory note but sells the promissory note to the Bank at an agreed-upon price.
Advantages for promissory note issuers (goods buyers):
- deferment of payment for goods supplied through issuance of a promissory note without diverting current funds;
- saving on costs in the event of early redemption of promissory note (by redeeming at the price below the nominal value).
Advantages for promissory note holders (goods sellers):
- prompt payment for goods shipped;
- promissory note holder presenting the note for accounting provides the bank a document package similar to the document package required for loan applications;
- bank accounts promissory notes under accounting agreement with the promissory note holder;
- agreement may be made for a specific term (general agreement on promissory note accounting) and/or accounting of specific promissory notes (separate promissory note accounting agreement).
