Commercial Paper is a source of short term finance since the early nineties. Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds and banks. Its regulation comes under the purview of the Reserve Bank of India.

Advantage:

(i) A commercial paper not contains any restrictive conditions and sold on an unsecured basis.

(ii) It is a freely transferable instrument

(iii) It provides more funds compared to other sources.

(iv) A commercial paper provides a continuous source of funds.

(v) Companies can park their excess funds in commercial paper and can earn some good return on the same.

Limitation:

i. Only financially sound and highly rated firms can raise money through commercial papers. New and moderately rated firms could not raise funds.

ii. The size of money that can be raised through the commercial paper is limited to the excess liquidity available with the suppliers of funds at a particular time

iii. Commercial paper is an impersonal method of financing. As such if a firm is not in a position to redeem its paper due to financial difficulties, as the maturity of a Commercial Paper is not possible.