Commercial paper is a short term debt instrument issued by a company. The main characteristics of commercial paper are:
- It is unsecured.
- It is short term (maturity and full repayment usually within an year of issue).
- It is usually less liquid than bonds - there is no real secondary market.
Commercial paper is usually issued in order to meet short term requirements rather than fund long term investments. Given that it needs to be repaid after a comparatively short time it would be very risky to tie the money up.
The savings made by issuing commercial paper over raising money by simpler means such as borrowing from a bank are fairly small in terms of the difference in interest rates. This means that commercial paper is usually useful only for raising fairly large amounts. This combined with its short term nature means its use restricted to large borrowers.