Commercial paper

banking

Commercial paper is a short-term financing instrument used and issued by companies that is based on the recognition of a commercial credit by the debtor.

The reason for issuing commercial paper is to grant the debtor a longer term to pay the commercial debt. Therefore, commercial paper is an instrument that arises from commercial activity and implies a right to collection from the client.

This instrument is widely used by companies in the daily management of the company given the high profit it reports. Since if they did not offer the credit, there would be customers who would not be able to buy their products. In this way they ensure that customers buy by delaying payment for a time and issuing a commercial paper as a promise of payment.

What kind of advantage does commercial paper have?

Commercial paper can be used by commercial credit providers to assign it to a third party and obtain liquidity. For example, a company could use this collection right with respect to the customer to discount it at a bank. In this way, the company would collect the loan in advance if required by its treasury.

As for the debtor, it allows him to finance himself in the short term at a low cost and less than bank credit. That is, since it allows you to delay the payment of the debt, the debtor is really financing himself at zero cost. Therefore, it is one more financing alternative that companies have to finance their assets.

Is there a downside to commercial paper?

The main problem that arises with commercial paper is that it does not ensure that the payment commitment is met. Even when the debtor recognizes the debt, he may default on his obligation when the commercial paper matures. Therefore, if the creditor wants to discount his payment before a third party, it could be somewhat complicated.

Therefore, it depends on the type of document in which it is reflected, you will have more guarantees when you want to discount.

Types of commercial paper

The most popular types of commercial paper depending on the document in which they are collected are:

  • Receipt: It is a document issued by the creditor detailing the main characteristics of the commercial credit: amount, term, etc. The problem is that the debtor does not appear in it and therefore the debt is not recognized. This means that the creditor has fewer guarantees in the event that he needs to discount it before a third party.
  • Bill of exchange: It is perhaps the type of commercial paper most used in business traffic. It is a payment obligation that is issued by the creditor against the debtor and that can be assigned to a third party. The main advantage, in relation to the receipt, is that it leaves the possibility of it being signed or accepted by the debtor. Therefore, it gives greater security when discounting it by the bank.
  • Promissory note: It differs from the two previous types in that, in this case, it is issued by the debtor. That is, it is now the debtor who recognizes the payment obligation without having to wait for the creditor to do so. The most popular and practically used type of promissory note is the bank promissory note. It is characterized by incorporating the current account that is the object of the payment and the date on which the payment can be made.

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