What is a Commercial Paper Funding Program (CPFP)?

A Commercial Paper Funding Program is a system established by the United States Federal Reserve Board to improve the markets short-term liquidity.  Basically, the CPFP program provided short-term funding to the United States commercial papers issuers.

Commercial paper funding program has the following benefits:

• It can be used by credit providers to obtain liquidity by simply transferring the commercial paper to the third party.
• It allows the debtor to get short-term fund at a considerably lower price than that of bank credit.

A major drawback of a Commercial Paper Funding Program is that there is no guarantee that payment will be fulfilled. In other words, there is a possibility of a debtor defaulting to meet the payment obligation especially after the CPFP expires.

What are the types of Commercial Paper funding Program?

There are various types of Commercial Paper Funding Program. They include the following:

• Receipt: This refers to a document given by a creditor which highlights the main features of the commercial credit. For instance, the amount involved and the term/period. Note that in this type of document does not show the debtor. This means that there is no debt recognition. This makes the creditor have a small number of guarantees where he/she requires to deduction from a third party.
• Bill exchange: This is the most widely used document in business traffic when it comes to CPFP. The document is usually meant to ensure that the debtor agrees to the obligation of repaying back the loan. It is usually given out by the creditor to the debtor and can at the same time be transferred to a third party if need be. The debtor is supposed to sign the receipt to accept the responsibility. This gives provides utmost security in case the bank decides to give a discount.
• I will pay: This document is different from the two above. This is because unlike the two, the debtor is the one who issues this particular document. In this case, the payment obligation is recognized by the debtor and not the creditor. A bank promissory note is known for this purpose. It consists of the current account payment as well as the payment date.