Line of Credit
Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.
Advantage of commercial paper:
- High credit ratings fetch a lower cost of capital.
- Wide range of maturity provide more flexibility.
- It does not create any lien on asset of the company.
- Tradability of Commercial Paper provides investors with exit options.
Disadvantages of commercial paper:
- Its usage is limited to only blue chip companies.
- Issuances of Commercial Paper bring down the bank credit limits.
- A high degree of control is exercised on issue of Commercial Paper.
- Stand-by credit may become necessary
Read more about this topic: Commercial Paper
Famous quotes containing the words line of, line and/or credit:
“When I had mapped the pond ... I laid a rule on the map lengthwise, and then breadthwise, and found, to my surprise, that the line of greatest length intersected the line of greatest breadth exactly at the point of greatest depth.”
—Henry David Thoreau (1817–1862)
“In order to get to East Russet you take the Vermont Central as far as Twitchell’s Falls and change there for Torpid River Junction, where a spur line takes you right into Gormley. At Gormley you are met by a buckboard which takes you back to Torpid River Junction again.”
—Robert Benchley (1889–1945)
“Laws remain in credit not because they are just, but because they are laws. That is the mystic foundation of their authority; they have no other.”
—Michel de Montaigne (1533–1592)