What is the difference between Commercial Paper and Banker’s Acceptance?

Commercial Paper and Banker’s Acceptance instruments have many of the same characteristics, so why choose to use one rather than another?

What is Commercial Paper?

Commercial paper (CP) is an unsecured short-term debt instrument issued by a corporation. This generally comes in the form of an unsecured promissory note issued at a discount and paying at face value.

What is a Banker’s Acceptance?

A Banker’s Acceptance (BA) is essentially CP but the debt is secured by a bank meaning that the bank is liable in the event of non-payment.

Why use a Banker’s Acceptance?

A BA will often be used to finance imports, exports and other overseas transactions and this is why they were originally drafted into law to promote trade. They specifically help trade by allowing corporations to offer lower risk, which supports their financing.

The instrument also allows for new relationships to be started more easily as in situations where creditworthiness cannot be ascertained.