Substitutes
Categories: Substitutes
Corporates have a wide range of financing alternatives, both short and long term to bank loans. The most important substitutes are the following:
Commercial paper. Commercial paper issues are corporate IOUs. They are short term in nature, typically 90 days to one year. They do not pay interest, are issued at a discount to par and are unsecured. In most countries commercial paper can be traded in a secondary market. In effect commercial paper is a form of short-dated zero coupon bond. Commercial paper investors include banks, insurance companies and corporate and institutional treasuries.
Commercial paper issues are most suitable for companies with a short-term or seasonal financing requirement. Some companies do, however, rely on them for long-term funding by continually rolling over their commercial paper. As one issue matures the company makes another.
This funding approach runs the risk of liquidity tightening and the company being unable to roll their paper over or having to pay a steep premium to do so. This occurred in 2002 in the US, for example, after the collapse of a number of large, high profile companies raised widespread investor concern about further corporate failures.