Imagine you went to a business to pay your bill, and you gave him a thousand dollars to take 300 dollars, but when he tried to return the change, he said he didn’t have enough, and then he handed you a piece of paper with writing on it. “We, a business, must pay 700 dollars for ‘Whoever’ from one of our branches within a month of the date of submission,” he says, signing it and stamping it with the store’s logo. This paper will serve as a guarantee that the money will be returned to you. This is an example of a Commercial Paper in its simplest form.

What are Commercial Papers?

So, what are Commercial Papers?

Commercial Papers are documents that carry an order to pay a specific amount as soon as it is reviewed or by the due date. Commercial Papers are widely accepted as a means of fulfilling financial obligations and serve as the transaction’s currency.

The Economic importance of commercial paper

importance of commercial paper

importance of commercial paper

Because merchants frequently do not keep cash in their safes because it is considered a disruption of investment, they require credit on a permanent basis, which they obtain by giving the buyer or debtor a period of time after which the credit value of the “required amount” is paid. As a result, the need for the presence of instruments that regulate commercial activities arose, which are later referred to as Commercial Papers, and they differ from securitized notes.

Reservation and proof of rights

Commercial Papers establish a right to a specific amount upon review or when the due date approaches, even if the person in charge of the money dies, because the right is established for the holder of a Commercial Paper “issued to” with a sum of money in the custody of someone who has “issued,” whether payment is made by him personally or by a third party known as the “drawee.”

Tradability

Where the Commercial Paper’s ownership can be transferred from one person to another, either by endorsement (writing on the reverse of the paper) or by “possession.”

Credit instrument

Commercial Papers are a type of “borrowing” credit instrument that ensures credit process discipline by establishing a deadline for meeting obligations. If the merchant does not pay after the deadline has passed, the cardholder has the right to pursue legal action.

Facilitating business operations

If you, dear reader, purchased items from a merchant and gave him a Commercial Paper that is due in three months, you have benefitted from the money you invested during that time, and you can now sell the products and pay the profits.

A tool to save money

Where Commercial Papers are a less expensive alternative to bank loans for conserving money. It also provides a steady flow of funds because it is tailored to the company’s growth and demands.

Types of Commercial Papers and different commercial papers

The Bill of Exchange

It is a “document” that includes an order from one person, “the drawer,” to another person, “the drawee,” to pay a certain sum of money for the benefit of a third person, “the beneficiary,” on a specific day or upon review. Three parties have a link with the bill.

If Ahmad purchased items from Ali for $ 500 and wanted to issue a draught, he would issue an instrument to a third party or a non-bank entity, such as me, by paying me $ 500 in April.

The Bearer Bond (Promissory Note)

It is a document in which the editor agrees to pay a specified sum to another person known as the beneficiary on a specific date, or subject to decision, or only after review, and the relationship between the two parties is limited.

Due to the nature of the bearer bond, which is not documented to a single bearer of a certain name, anyone who owns it will benefit from it, and it will be transferred by endorsement, i.e. signing on the reverse of the bearer’s bond.

Checks

It is a document that includes an instruction from the drawer “the first party” to the drawee “the second party,” which is usually a bank, to pay a specified sum to a third party known as the beneficiary, according to a specific form. The statute provided some protection to the checks by imposing a legal penalty that may endure for years if there was no balance sufficient to pay the check’s value.

Types of checks

There are various sorts of checks, each with its own set of requirements, guarantees, and arrangements:

  • Crossed check

The presence of two parallel lines on the check distinguishes it as a check issued according to a certain form. These two lines indicate that the check’s value is not fulfilled unless the check is drawn on one of the bank’s clients or to another bank.

  •  Certified check

The presence of the words “certified” or “accepted” on the check, along with the date and address of the bank drawn on it and the signature of the employee, indicates that the bank has approved the validity of the drawer’s signature and the presence of sufficient funds in the account to cover the check’s value for the beneficiary.

  • Check credited to an account

It’s a regular check on which the drawer’s “check editor” has written a phrase indicating that the check’s value cannot be paid in cash. Rather, written limits, such as writing “charged to the account,” are used to make payments.

  • Tourist checks “travelers checks”

Checks with varied values issued by institutions to their branches or correspondents from abroad, issued for the benefit of the traveller who can obtain its value once it is shown to the party that accepts it.

  • Certified bank check

A check issued by the drawing bank that it uses to pay a third party the value of the transferred instrument.

  • Bank transfer checks

Checks issued by banks when one of their customers requests that money be transferred from the bank to another individual so that he or his representative can collect it.

Operations on Commercial Papers

different commercial papers

different commercial papers

During our previous discussion in the article, we have referred more than once to some of the concepts related to the Commercial Papers, we will explain below the most important operations that are involved.

Commercial Papers Endorsement 

The endorsement is a legal action that allows the Commercial Paper to be transferred from one person to another, in which a person known as the “endorser” signs on the back of the Commercial Paper for a person known as “the endorsed to,” and this action results in either transferring ownership of the Commercial Paper, or granting power of attorney to fulfil its value, or mortgaging it with a statement.

The Commercial Paper Discounting

It is an activity taken by the holder of a Commercial Paper that comprises transferring ownership of the Commercial Paper to a third person by endorsement before the due date, resulting in the Commercial Paper’s value being hastened, minus a set sum.

Commercial papers differ according to the tasks for which they were designed, as we discussed earlier in the text.

The development of Commercial Papers in the forms that we presented was a response to the need of financial societies as a result of the development in trade and economic life in general, and we as individuals must deal with Commercial Papers in particular with our entry into working life. As a result, we must expand our knowledge of it, its types, and the financial and legal obligations that arise from it.

Have you ever had a question or a problem with one of the Commercial Papers? Have you ever heard of someone who has misplaced a Commercial Paper? In the comments, tell us about your experience.

What is meant by Commercial Paper endorsement?
What are the traveler’s checks?
What is the bill of exchange?
What are the types of the Commercial Papers?