Legal Definitions - commercial paper

Commercial paper refers to a type of unsecured, short-term debt instrument issued by large corporations to meet their immediate financial needs. Essentially, it's a promise by a company to pay a specific amount of money to the holder on a future date, usually within 270 days. Companies often use commercial paper as a cost-effective way to finance short-term obligations like inventory purchases, payroll, or other operational expenses, rather than taking out a traditional bank loan.

Here are some examples to illustrate how commercial paper is used:

• Imagine a major electronics retailer preparing for the busy holiday shopping season. To stock up on a large volume of new televisions and laptops, the retailer needs significant capital quickly but doesn't want to use its long-term funds. Instead, it issues commercial paper to institutional investors, promising to repay the borrowed amount plus a small return in 90 days. This allows the retailer to acquire the necessary inventory promptly, expecting to sell it well before the commercial paper matures.

  This illustrates commercial paper as a tool for financing short-term inventory needs, providing quick access to funds without the complexities of a traditional bank loan.

• Consider a large manufacturing company that has a substantial payroll due at the end of the month. However, several significant payments from its customers are slightly delayed and won't arrive until the first week of the next month. To bridge this temporary cash flow gap and ensure employees are paid on time, the company issues commercial paper for 30 days. This provides the immediate funds needed to cover payroll until the expected customer payments are received.

  Here, commercial paper is used to manage short-term liquidity and cover operational expenses like payroll during a temporary cash flow imbalance.

• A multinational software company decides to launch an aggressive, short-term marketing campaign for a new product, expecting a quick return on investment within a few months. Rather than going through the potentially lengthy process of securing a bank loan for such a brief period, the company issues commercial paper to various investors, promising repayment in 60 days. This allows them to quickly fund the campaign and capitalize on market opportunities.

  This example demonstrates commercial paper as a flexible way to finance specific, short-duration projects or initiatives without tying up long-term capital or incurring the higher costs often associated with short-term bank credit.