What is Commercial Paper?

Commercial paper is unsecured debt that is issued by an entity, and which has a fixed maturity ranging from one to 270 days. A company uses commercial paper to meet its short-term working capital obligations. It is commonly sold at a discount from face value, with the discount (and therefore the interest rate) being higher if the term is longer. A company can sell its commercial paper directly to investors, such as money market funds, or through a dealer in exchange for a small commission.

Who Issues Commercial Paper?

Because there is no collateral on commercial paper, it is only an option for large companies with high-level credit ratings from a recognized credit rating agency.

Advantages of Commercial Paper

For those companies capable of issuing commercial paper, there are several advantages. They are as follows:

Low interest rate. The interest rate on commercial paper is extremely low, making this one of the cheapest forms of financing available to larger businesses.
No registration required. An advantage for issuers is that no registration is required; this greatly reduces the cost of issuance.
Short-term financing flexibility. Commercial paper is typically issued with maturities ranging from a few days to about 270 days, allowing companies to align funding with their immediate needs. This flexibility makes it an ideal tool for covering short-term liabilities like payroll or seasonal expenses.
No collateral required. Since commercial paper is unsecured debt, companies don’t have to tie up assets as collateral, which frees up resources for other uses.
Reduced dependence on banks. By issuing commercial paper, companies can bypass traditional bank loans, which may have more stringent requirements or higher costs. This provides an alternative financing source that’s often faster and more efficient.