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Short Term Sources of Finance

An unsecured, short-term debt instrument issued by a


corporation, typically for the financing of accounts
receivable, inventories, and short-term liabilities.
Maturities on commercial paper rarely are longer than
270 days, and commercial paper usually is issued at a
discount to prevailing market interest rates.
Commercial paper is not backed by any form of
collateral; therefore, only firms with high-quality debt
ratings will find buyers easily without having to offer a
substantial discount (higher cost) for the debt issue.
A company would be eligible to issue CP provided:
(i) the tangible net worth of the company, as per the
latest audited balance sheet, is not less than Rs.4
crore;
(ii) the company has been sanctioned working
capital limit by bank/s or FIs; and
(iii) the borrowal account of the company is
classified as a Standard Asset by the financing
bank/institution.

Commercial paper is available in a wide range
of denominations, can be
either discounted or interest-bearing, and usually
have a limited or nonexistent secondary market.
Commercial paper is usually issued by companies
with high credit ratings, meaning that
the investment is almost always relatively low risk.
The proceeds from this type of financing can only be
used on current assets (inventories) and are not
allowed to be used on fixed assets, such as a new
plant, without SEC involvement.