What Is a Two Name Paper?
In finance, “two name paper” is a colloquial term referring to a contract that has been signed by two parties. It is specifically in the context of commercial paper instruments such as trade paper or promissory notes.
- A two name paper is a type of contract bearing the names of two parties.
- It often refers to short-term contracts such as those used to finance accounts payable.
- Another common example are the promissory notes often used to finance private acquisitions.
How Two Name Papers Work
A two name paper is commonly used as a type of short-term financing for trade acceptances. In these agreements, a supplier agrees to extend credit to its customer, typically for a set term such as 30 days. In this scenario, the supplier would be the issuer of the trade acceptance, whereas the customer would be its receiver. If both parties sign the document, then it would be considered a two name paper.
Another context in which the term “two name paper” is used is where one party is endorsing the commercial paper. For example, the customer’s bank might agree to endorse their trade acceptance with their supplier. In this instance, the two signatures might consist of the supplier and the bank, making the bank liable to repay the debt if the customer fails to do so.
Two name papers are widely used in business because they can provide a time-efficient and relatively straightforward way to extend credit between parties. Importantly, these agreements do not require significant input from lawyers, bankers, or other intermediaries, making them a potentially attractive and cost-effective financing solution. Of course, their relatively informal nature also requires a relatively high amount of trust, since two name papers may be more difficult to enforce than more formal agreements.
Real World Example of a Two Name Paper
Michael is an investor specializing in small to medium-sized private businesses. Recently, he has reached an agreement with the owner of XYZ Industries whereby Michael will purchase the business for $1 million. Michael does not wish to invest all of his cash into this transaction, so he proposes to fund part of the purchase by issuing a two name paper.
Specifically, Michael proposes that he pay $300,000 of the purchase price in cash while paying the balance through a promissory note. Specifically, the terms of this promissory note would require Michael to pay the seller of XYZ $100,000 per year for the next 7 years, with interest of 5.00% payable in arrears on the unpaid portion. If the two parties agree to these terms, their names and signatures would be applied to the promissory note, making this document a two name paper.