The What, When and Whys of Commercial Papers as Debt Repayment Instruments

If you have just started out in the retail business, you must be ready to work with debtors. The supplies you get from wholesalers will not always find a ready market. You will sell them on credit to some of your customers such that they will pay for the goods on a certain date in the future, often after they have made their sales. Your debtors prefer various methods of paying debts, depending on what suits their business needs and operations. Commercial papers, being one of the popular repayment methods in the retail business, are examined here to help you gain insight:

Defining a Commercial Paper

A commercial paper refers to a debt repayment instrument issued by a firm to finance accounts receivables, short-term liabilities and the supply of goods or inventory in the short term. Typically, most commercial papers are valid for around two hundred and seventy days (less than a year) and they are issued at a discount to reflect the interest rates prevailing in the market.

Commercial Papers and Debt Security

Unlike many other debt agreements in the business world, there is no collateral pledged for commercial papers. The debtor will not give you any security for the goods you are selling them, making it an unsecured form of debt agreement. For this reason, you should only work with commercial papers if you are certain that the debtor has a good credit rating. This will keep you from incurring unprecedented losses because debtors with a poor credit rating may not be able to meet the obligation within such a short period of business days.

Working with professional debt collectors is the best way of understanding your debtor's ability to pay their obligations when they fall due. They use innovative methods such as the three-phase approach where they analyse, score and rate your debtors before advising you on whether commercial papers are such a good idea.

Benefit of a Commercial Paper

Despite the fact that they are limited to debtors with a good credit rating, commercial papers are very cost effective means for your retail business to collect your money from those who owe you. Commercial papers are a form of promissory note where the debtor makes a signed promise to pay. They are legally binding on the debtor without the need to register with securities and exchange governing bodies. This makes them very pocket-friendly. Moreover, commercial papers are issued at low interest rates, making it easy for your firm to find customers that will be willing to pay in the future.