Commercial Paper vs Commercial Bill
We keep hearing terms like Commercial Paper (CP) and Commercial Bill in financial and corporate circles without ever understanding their significance and importance. These financial instruments serve two different purposes. Despite having the word commercial prefixed, there are many differences between the two. This article attempts to highlight the features of commercial paper and commercial bill and the differences between these financial instruments.
Commercial paper is a borrowing instrument that banks and other financial companies make use of to finance short-term investments. Usually banks and large corporations use CP to manage working capital or to purchase inventory. You can think of CP as an instrument to raise capital for a short time period, which is usually less than a year. It is a discounted instrument having a face value and a maturity value. The purchaser of a commercial paper buys it at the discounted rate which is equal to the maturity rate minus the interest CP carries. These commercial papers have a rating that is indicative of their safety and security and reflects the confidence of the investors in these instruments.
In India, companies having a net worth of at least four crores are allowed to raise capital by issuing these commercial papers.
Commercial bills, as the name implies, are instruments issued by banks that finance invoices raised by a company. Suppose a company selling goods or products to another company is apprehensive about the payment or at least wishes to enhance the safety of his money can get commercial bills issued by banks. Banks issue advance payment in lieu of invoices that show sale of goods. This is an instrument that comes into effect only after a sale has taken place. This is an instrument used by banks to accept and/or discount the bills of a customer. Commercial bills are issued for financing needs of medium term.
What is the difference between Commercial Paper and Commercial Bill?
• Commercial paper and commercial bill are both financial instruments used by banks.
• Commercial paper is used by banks to raise finances for a short time period. The buyer gets CP at a discounted rate, while he gets face value on maturity.
• Commercial bill is an instrument that helps companies to get advance payment for the invoices they raise after making sales to their customers.
• Commercial paper is used by banks to meet their short-term obligations, while commercial bills help companies to get money in advance, for sales they make.