Thursday, August 27, 2009

Advantage Of Issuing Commercial Paper(2)

Another advantage of borrowing in the commercial paper market is that rates there are most flexible than bank loan rates. Moreover, a company in need of funds can raise money quickly through either dealer or direct paper. Dealers maintain close contact with the market and generally know where cash may be found. Frequently, notes can be issued and funds rose the same day or within a day or two.
Generally, larger amounts of funds may be borrowed more conveniently through the paper market than from other sources, particularly bank loans. This situation arises due to federal and state regulations which limit the amount of money a bank can lend to any single borrower. For national banks, the maximum unsecured loan is 10 percent of the bank‘s capital and surplus account. frequently, corporate credit needs exceed an individual bank‘s loan limit, and a group of banks (consortium) has to be assembled to make the loan. However, this takes time and requires lengthy and complicated negotiations. Using the paper market is generally much faster than trying to hammer out a loan agreement among several parties. Moreover, the ability to issue commercial paper gives a corporation considerable leverage when negotiating with banks. A banker who knows that the customer can draw upon the commercial paper market for funds is more likely to offer advantageous terms on a loan and be more receptive to future customer credit needs..

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