I will pay at sight
A demand note is a collection right whose fundamental characteristic is that it can be collected at any time from its issuance until the following twelve months, generally.
The promissory notes are debt securities that formalize a firm promise to settle a liability contracted with a third party in the future and are usually classified according to their maturity.
Types of promissory note and their characteristics
Maturity is a key term of the promissory note, both for the debtor and signer, who issues it, and for the creditor, who receives it to collect the debt. It indicates the day or period of time in which your creditor or beneficiary can present the title to collect it.
Based on this criterion, there are four types of promissory notes:
- I will pay on a fixed date: It is due on a specific day, for example, “February 22, 2022”.
- Promissory note as of the date: Indicates that the promissory note matures after a certain period of time has elapsed from the date of issue. For example, "45 days from date."
- I will pay a term counted from the sight: Indicates the date on which the debtor gives the approval to his creditor. This is because the beneficiary must present the promissory note to the issuer for acceptance for collection. Therefore, the period begins to run from the day of acceptance. If there was no acceptance, it would start counting from that date anyway.
- Demand note: The maturity may be blank and it will be understood that it is a demand note. Its maturity is usually twelve months from the date of issue. Therefore, the collection period ranges between the time of issuance and the following twelve months, on business days. However, the issuer may voluntarily increase or decrease said term, increasing or decreasing the flexibility of its debtor.
Therefore, in sight promissory notes the determination of maturity is left to the choice of the beneficiary. He can choose any day to collect it and his debtor assumes that he must pay it when the creditor appears for collection. It could also happen that, after twelve months, the issuer consents to the extension of the term.
Regarding risk, promissory notes generally represent credit sales and, therefore, all carry a liquidity risk that occurs when the debtor does not have money to pay the creditor. The risk will be highest for long-maturing notes and lowest for short-maturing notes. From this it is understood that the liquidity risk of demand promissory notes is very low, since the beneficiary can request collection at the same time that the promissory note is delivered to him.
Promissory note purchasing companies
Especially in the case of promissory notes with medium and long maturities, there are companies that are dedicated to buying these securities from their beneficiaries. These will sell the promissory notes when they need to collect with immediate urgency but the time of payment is not until within a certain period.
In this way, three different companies operate: the debtor and issuer of the promissory note, the creditor and initially beneficiary of the promissory note and the purchaser of the promissory note. Furthermore, we assume that the promissory note implies a three-month collection right.
If the creditor company needs to collect with immediate urgency but the right of collection is not until within three months, it has the option of selling it to the buying company.
In this case, the purchasing company will acquire the promissory notes at a discount. That is, they will pay the creditor company a lower amount than that initially established between the creditor and the debtor. And, in this way, the creditor receives the money at the moment.
The securitization process
However, when the buying company is not a bank and does not have sufficient liquidity to pay the creditor, it will create what is known as a securitization fund.
The securitization fund is used to finance the purchase of the promissory notes. The company assigns the notes to the fund and the fund issues bonds (or other notes) whose collateral are said securities. These bonds are placed among investors in the market, who are paid an interest rate to buy them.
At the time of payment in which the debtor must pay the holder of the promissory note, the buyer company, the buyer will receive the amount agreed in the promissory note and will earn the difference compared to what it paid to the creditor company and the commissions offered to investors of the bonds issued by the securitization fund.