Question

Saqib Ltd. is a large credit worthy company operating in the Kashmir Valley. It is an export oriented unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for the company. Many craftsmen and workers have been dislocated and raw material has been destroyed. The firm is therefore, unable to get an uninterrupted supply of raw material, and the duration of the production cycle has also increased. To add to the problems of the organisation, the suppliers of raw material who were earlier selling on credit are asking the company, for advance payment or cash payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that taking a bank loan is the only option with the company to meet its short-term shortage of cash. 

As a finance manager of the company name and explain the alternative to bank borrowing that the company can use to resolve the crisis.

Answer 1

As a finance manager of company, I shall opt for one of the money market instruments, preferably commercial paper. Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. 

Following are the features of a commercial paper : 

1. Commercial paper has a fixed maturity period ranging from 15 days to one year. 

2. It is issued by large and creditworthy companies. 

3. It is negotiable and transferable by endorsement and delivery. 

4. It is sold at a discount and redeemed at par. 

5. Its rate of interest is lower than market rates.