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Commercial Papers

A commercial paper is a short-term promissory not reissued by a reputed company to meet its working capital requirements. The maturity of such papers may vary form 15 days to 364 days. These instruments are generally purchased by commercial banks, insurance companies and mutual funds. Commercial papers are not backed by any security; so they can be issued by credit-worthy companies only.

The amount raised by issuing commercial papers is generally very large. But only the firms having good credit rating can raise funds by issuing commercial papers as the debt is totally unsecured.

Merits of Commercial Papers. The merits of commercial paper as a source of finance are as follows:

(i)    It does not need any security of tangible assets.
(ii)    It is a liquid instrument since it is freely transferable.
(iii)    It can be used for raising large amount of funds.
(iv)    Its cost is lower than the cost of commercial bank loans.
(v)    Its maturity can be tailored to meet the needs fo the business. Moreover, maturing commercial paper can be repaid by issuing a new commercial paper.

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