In the money market, commercial paper is a financial instrument that matures before nine months (270 days), and is only used to fund operating expenses or current assets (e.g., inventories and receivables) and not used for fixed assets, such as land, buildings, or machinery. By meeting these qualifications it may be issued without U.S. federal government regulation, that is, it need not be registered with the U.S. Securities and Exchange Commission. Commercial paper is a type of negotiable instrument, where the legal rights and obligations of involved parties are governed by Articles Three and Four of the Uniform Commercial Code, a set of non-federal business laws adopted by each of the 50 U.S. States.
Commercial paper is defined in Canada as having a maturity of not more than one year and is exempt from dealer registration and prospectus requirements.
Commercial paper is an alternative to a line of credit with a bank. Once a business becomes large enough, and maintains a high enough credit rating, then using commercial paper is always cheaper than using a bank line of credit. Nevertheless, many companies still maintain bank lines of credit to act as a "backup" to the commercial paper. In this situation, banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, if the company ever actually needs to use the line of credit it would likely be in serious trouble and have difficulty repaying its liabilities.
Currently, more than 1,700 companies in the United States issue commercial paper. At the end of 2007 there was $1.788 trillion in total outstanding commercial paper. Of which $839 billion was "asset backed" and $846 billion was not ($153 billion of this was issued by non-financial corporations, and $797 billion was issued by financial corporations).
Commercial Paper Makes Big Splash in International Markets, Study Finds; Borrowing Via Syndicated Loans, Note Issuance Facilities Drops
Jul 25, 1986; Commercial Paper Makes Big Splash In International Markets, Study Finds Borrowing Via Syndicated Loans, Note Issuance Facilities...