What is a Commercial Paper?

Malcolm Tatum
Malcolm Tatum

Commercial papers are debt instruments that are often utilized to meet short-term credit needs. As an unsecured obligation that is often utilized as an investment in a money market account, the duration period for a commercial paper is limited. Generally, a commercial paper may carry a maturity from anywhere between one business day to six months from the date of issue.

Businessman with a briefcase
Businessman with a briefcase

In most cases, a commercial paper note will be issued in denominations that are at least $100,000.00 US Dollars (USD). However, it is possible to issue a commercial paper note that is composed of multiple units of $1,000.00 USD that total to an amount exceeding the hundred thousand dollar mark. This can allow purchases of one or several units of the commercial paper, depending on the desires of the investor.

Commercial paper is generally issued by corporations or by large banking institutions. The main function is usually to provide funds for the company’s Accounts Receivable in order to handle short-term obligations. The expectation is that the issuing entity will be in a position to honor the face value plus interest by the date of maturity on the paper.

The commercial paper is not considered a proper debt instrument to generate funds for long term projects. When a company wishes to generate a source of revenue for any purpose that will exceed a six month window, other investing and fund raising strategies will work better than the short-term solution represented by the issue of a commercial paper.

Companies may choose to issue a commercial paper as a means of handling several short term projects. One common reason for the issue of a commercial paper is to generate funds for the purchase of inventory items that are required for an upcoming project. With the completion of the project and the receipt of revenue from the venture anticipated to occur between the date of issue and the date of maturity, the company can manage the project without having to go through a complicated loan process in order to finance the activity.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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