Commercial Paper: Is Your Company Big Enough to Issue It?

Commercial paper is a short-term, unsecured promissory note that a company sells directly to institutional investors, often money market funds, to cover near-term funding needs like payroll or inventory. Maturities typically run a matter of weeks rather than years, and companies that issue it continuously roll maturing paper into new paper, treating the program as a rotating source of working capital rather than a one-time loan.

Investors buying commercial paper are relying almost entirely on the issuer's short-term credit rating, since the notes are unsecured and there's no collateral to fall back on if the company can't repay. That means a credit rating from a recognized agency is effectively a prerequisite, and earning one requires a level of financial disclosure, size, and track record that most privately held mid-sized companies simply haven't built yet.

Even companies that could technically qualify often find the program isn't worth the overhead unless they need to issue frequently and at real scale, since the fixed costs of running a program don't shrink for a smaller issuer.

Because commercial paper investors expect to be repaid at maturity, not rolled indefinitely at the issuer's convenience, most programs require a backup line of credit sized to cover the outstanding paper in case the company can't find new buyers when existing notes mature. That backup facility isn't optional in most cases; it's effectively a second financing arrangement sitting behind the first, and banks charge a fee for providing it whether or not it's ever drawn.

Think of the backup line as insurance the market requires you to carry, not a redundant cost you can skip once the program is running smoothly. Rating agencies and dealers both look for it as a condition of supporting the program, since it's the mechanism that keeps a temporary gap in investor demand from turning into an actual default on maturing notes.

Beyond the interest rate on the paper itself, a program carries costs a simpler loan doesn't: rating agency fees paid annually to maintain the rating, dealer or placement agent fees for distributing the paper to investors, and the backup line's commitment fee sitting in reserve the whole time. For a company issuing a modest amount relative to these fixed costs, the all-in cost of running the program can end up higher than a conventional facility, even though the headline paper rate looks attractive on its own.

Costs beyond the interest rate on the paper:

• Rating agency fees, paid annually to maintain the credit rating that investors rely on when buying unsecured notes.
• Dealer or placement agent fees for distributing the paper to institutional investors.
• The commitment fee on the backup liquidity line that most programs require to cover maturing paper.
• The total of all three, which you should compare with a conventional bank line before assuming the lower headline rate makes paper cheaper.

For most mid-sized companies, a revolving line of credit or a term loan from a bank achieves the same funding purpose without the rating, dealer relationship, or backup facility overhead that commercial paper requires. These conventional options scale down to a size that actually matches typical working capital needs, and the relationship-based underwriting a bank uses doesn't demand the same public credit signal that institutional commercial paper investors expect.

If your company is genuinely large enough and issuing frequently enough that a rating and dealer relationship would pay for themselves, commercial paper is worth exploring with your investment bank. For most readers of this guide, that threshold hasn't been reached yet, and a conventional facility remains the more practical tool.

Revisit the question periodically rather than assuming the answer never changes. A company that grows revenue meaningfully, strengthens its balance sheet, and starts issuing short-term borrowing needs frequently enough can eventually reach a size where the fixed costs of a program stop looking like overhead and start looking like a genuine improvement over a bank facility's rate.