Takeaways
- Commercial paper is unsecured, short-term debt issued to raise money.
- Corporations issue commercial paper to pay for short-term bills, like payroll.
- Commercial paper is issued to investors at a discount to its face value.
- Maturities on commercial paper typically range from 1 to 270 days.
- Investors earn a return on commercial paper by holding it to maturity or selling it on the secondary market.
What Is Commercial Paper?
Commercial paper is an unsecured, short-term debt instrument used by companies to cover immediate expenses.[1] Corporations rely heavily on this debt instrument when they need large short-term slugs of capital to cover costs like payroll, inventory purchases, and other short-term obligations. Unlike a secured loan, commercial paper does not require any collateral, so only companies with strong credit ratings can take advantage of issuing commercial paper.
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How Does Commercial Paper Work?
You can think of commercial paper as an IOU from a corporation. Companies that need cash quickly issue these IOUs, and in exchange for accepting these securities, investors earn the difference between the face value and purchase value.
Here’s an example of how a corporation might issue its commercial paper:
- A company issues commercial paper with a stated face value of $1,000,000 with a maturity of 90 days.
- Investors buy this commercial paper at a discounted price, say $980,000.
- On the 90-day maturity date, the company repays the full face value of $1,000,00 to the investors.
- The investors earn the $20,000 difference as profit.
Because there is no collateral involved, the company’s ability to repay relies entirely on its reputation and credit rating from credit rating agencies, like the Standard & Poor’s, Moody’s and Finch. For this reason, commercial paper is issued mainly by large, financially stable firms.
Read More: What Is Unsecured Debt?
Who Buys Commercial Paper?
Institutional investors buy most commercial paper. The minimum investment amounts, usually around $100,000, are usually too high for individual or retail investors.
When investors purchase this commercial paper, they buy it at face value and earn a profit when the company repays the full amount at maturity. Because these investments mature quickly and are in steady demand, they are considered easy investments for large investors to buy and sell.
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Commercial Paper Terms to Know
- Issuer – The company that creates and sells the commercial paper to raise short-term cash.
- Secured – A type of debt that is backed by collateral, such as property or other assets, which the lender can claim if the borrower fails to repay. (Learn more about Secured Loans).
- Unsecured – A type of debt that is not backed by collateral. Commercial paper is usually unsecured, meaning repayment depends on the issuer’s credit and reputation. (Learn more about Unsecured Loans).
- Term or Maturity – The day the debt must be repaid in full. For commercial paper, this is always short-term and cannot exceed 270 days.
- Liquidity – Because of its short duration and strong demand among large investors, commercial paper is considered highly liquid, meaning it can be bought and sold easily.
- Face Value – The full dollar amount that the issuer agrees to repay to the investor at maturity.
- Discount Rate – The difference between what the investor pays for the commercial paper and what they receive when it matures, which represents the investor’s return.
Pros of Commercial Paper
Commercial paper is a highly effective instrument for maintaining large-scale commerce. Here are several reasons why companies like issuing commercial paper to investors:
- Lower Borrowing Costs – Typically cheaper than short-term bank loans for the issuer, and there is a large secondary market.
- Fast Access to Cash – Issuing commercial paper is a quicker process than applying for and securing a loan.
- No Collateral Needed – Issuers do not need to tie up assets to secure funding.
- No Registration – As long as the terms include a maturity date no longer than 270 days, the commercial paper doesn’t need to be registered with the Securities and Exchange Commission (SEC).
Cons of Commercial Paper
It is important to remember that commercial paper doesn’t come without risks and uncertainties. Here are several disadvantages of commercial paper:
- High Credit Requirement - Only companies with excellent credit ratings can issue it at competitive rates.
- Unsecured - Investors take on more risk because there is no collateral to seize in the event of a default.
- Not Retail-Friendly - Large minimum investment sizes make it inaccessible for most individual investors.
Other Types of Short-Term Debt to Know
There are a variety of financial instruments similar to commercial paper. Here are several you should know:
- Certificates of Deposit (CDs) - Short-term deposit products from banks. They are insured and carry a guaranteed return rate. (Read more about Certificates of Deposits).
- Bankers’ Acceptances - Drafts guaranteed by a bank. While not technically commercial paper, they are sometimes grouped together for comparison. (Read more about banker’s acceptances).
- Repurchase Agreements - Short-term, collateral-backed borrowing agreements, where one party agrees to repurchase securities at a future date for a certain price.
- Promissory Notes - The most common form of commercial paper is a written promise to pay the full amount on a specific date.
- Drafts - Instructions for one party to pay another. Typically used to document payment for goods or services.
Smart Summary
Commercial paper is a short-term funding tool used by financially strong companies to manage immediate cash needs. A lot of these companies are publicly traded with very healthy balance sheets. They are sold at a discount and repaid at full value, with investors earning the spread. While it is a cost-effective way for companies to raise capital quickly, it carries some risk for investors because it is unsecured. However, for retail investors, they can be part of a well-balanced investment portfolio.
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(1) Federal Reserve. Commercial Paper Rates and Outstanding Summary. Last Accessed February 20, 2026
