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What has the highest interest rate? 1 payday loans 2 bank loans 3 credit cards

The most important risks of a factor are:

  • Counter party credit risk: risk covered debtors can be re-insured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.
  • External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, unassigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.
  • Legal, compliance, and tax risks: a large number and variety of applicable laws and regulations depending on the country.
  • Operational: operational risks such as contractual disputes.

Commercial Paper

Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations.

Learning Objectives

Analyze the commercial paper market

Key Takeaways

Key Points

  • There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money market funds. Alternatively, it can sell the paper to a dealer, who then sells the paper in the market.
  • Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit.
  • Asset -Backed Commercial Paper (ABCP) is a form of commercial paper that is collateralized by other financial assets.

Key Terms

  • money market: A market for trading short-term debt instruments, such as treasury bills, commercial paper, bankers’ acceptances, and certificates of deposit.