Commercial Paper (CP):
It is an unsecured promissory note issued by a firm to raise funds for a short period. The maturity period of commercial paper usually ranges from 90 days to 364 days. Being unsecured, only firms having good credit rating can issue the CP and its regulation comes under the purview of the Reserve Bank of India.
Merits:
1. A commercial paper does not contain any restrictive conditions.
2. As it is a freely transferable instrument, it has high liquidity.
3. A commercial paper provides a continuous source of funds.
4. They are cheaper than a bank loan.
Limitations:
1. Only financially sound and highly rated firms can raise money through commercial papers
2. The size of money that can be raised through commercial paper is limited
3. Commercial paper is an impersonal method of financing. Extending the maturity of a CP is not possible.
4. Issue of commercial paper is very closely regulated by the RBI guidelines.
