Commercial paper is a money market security sold by banks and corporations. You can invest in these short-term unsecured promissory notes issued by corporations and foreign governments for many large, creditworthy issuers. Commercial paper is a low-cost alternative to bank loans. It is a very safe investment and can be used for inventory purchases or working capital.
Use of commercial paper can efficiently raise large amounts of funds quickly and without expensive SEC registration by selling paper, either directly or through independent dealers, to a large and varied pool of institutional buyers. Competitive, market-determined yields in notes whose maturity and amounts can be tailored to specific needs, can be earned by investing in commercial paper. The essential qualities of this type of investment is short-term maturity (typically three to six months), an automatic or self-liquidating nature, and non-speculativeness in origin and purpose of use.
The two main methods of issuing commercial paper are selling them directly to an investor, or selling them to a dealer who then sells them in the market.
The advantages of investing in commercial paper are:
- To obtain cash with which to take advantage of cash discounts offered by trade creditors
- To establish national credit
- To keep a reserve of borrowing power at local banks
- To borrow at cheaper rates than is possible at your local banks
- To establish a broader market for the paper than is possible locally