Advantages And Disadvantages Of Commercial Bank Loans

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The second source of short-term financing is commercial bank loan which is one of the primary sources of short-term financing, especially for small businesses (Jonathan Berk, Peter DeMarzo & Jarrad Harford, 2015). Commercial bank loans always being used by most firms as it is the simplest and most common source of short-term finance. Jonathan Berk, Peter DeMarzo & Jarrad Harford (2015) added in their book Fundamentals of Corporate Finance that bank loans are typically initiated with a promissory note which is a written statement that indicates the amount of the loan, the payment is due and the interest rate. This note have a similarity as trade credit which has the payment’s due but, commercial bank loans does not have a discount. Hence, commercial …show more content…

Commercial paper is sure quick rather than bank loan which is slow in processing the additional funds that a firm’s need and cost-effective way of raising working capital. Furthermore, they are cheaper than a bank loan while it is unsecured and thus does not creates any liens on assets of the company. Plus, the liquidity is high enough for a big company issuing commercial paper to fill in gaps in their cash flow and it provides the exit option to the investors to quit the investment as it is for a short-term financing. Thus, a short-term financing likely to have high risk and have high in return. Meanwhile, the advantages are it reduce credit limits with banks and reduce reliability due to its strict oversight. Next, it is only available only to a few selected blue chip and profitable companies. Blue chip company can be described as a company that has a price of more than RM 1.00 per unit which is higher than penny chip company who has a price lower than RM 1.00 per unit. Lastly, there is a possibility that the company will stop rolling over the commercial paper program and new debt instruments might not be available in the

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