what s more the proceeds from this type of financing can only be used on current assets or inventories they are not allowed to be used on fixed assets such as a new plant without sec involvement 
low interest rates for issuers mean low rates of return for investors also due to the large minimum denomination of 100 000 commercial paper typically isn t directly available to smaller investors however they can invest indirectly through companies that buy commercial paper who issues commercial paper commercial paper is usually issued by large corporations with strong credit ratings the important part here is that commercial paper usually does not require collateral therefore in order to issue commercial paper these companies usually have to be in good standing with strong external relationships these types of companies can range across differing industries for example manufacturing companies may issue commercial paper as manufacturers require an influx of inventory as part of their business cycle they may not have enough capital on hand to buy goods they need which they ironically need in order to sell in order to raise capital issuing commercial paper gives these types of companies upfront capital they may need to kickstart revenue cycles note that commercial paper is useful here only if the company expects to convert the raw materials into revenue in a relatively short amount of time another type of issuer of commercial paper could be service providers in a similar example as above consider a consulting firm that provides legal services in order to generate income these firms have to pay staff however without upfront capital to pay staff the firms can t generate that income by issuing commercial paper these firms get the money upfront they need to drive revenue again just like with manufacturing companies the service provider should expect to be able to generate short term income to align with the commercial paper cycle who buys commercial paper commercial paper is primarily invested in by institutional investors due to its nature and characteristics these investors include money market funds that aim to maintain liquidity while earning a modest return money market funds prefer commercial paper due to its short maturity and relatively low risk fitting well within their investment strategies that emphasize safety and liquidity corporate treasurers also invest in commercial paper as part of their short term cash management strategies companies with excess cash often seek to park their funds in high quality short term instruments that can be quickly liquidated if needed instead of having corporate cash sit by the wayside not generating income corporations can buy commercial paper to generate revenue while not having to take on any substantial level of risk or sacrifice longer term corporate strategy pension funds insurance companies and other institutional investors with a mandate to manage large sums of money may also invest in commercial paper lastly banks and other financial institutions are usually also prominent investors in commercial paper they use it as part of their asset liability management strategies to match the durations of their assets and liabilities more effectively for instance if a bank has a number of short term liabilities coming due it can choose to maximize the efficiency of its capital by investing in commercial paper with the same maturity of that debt commercial paper vs bondsboth commercial paper and bonds are debt instruments however there are important differences between them that are useful to know commercial paper maturities extend from one to 270 days 2 bonds mature in one to 30 years 8 though a company may report part of its bonds as short term debt a majority of bonds are usually longer term compared to commercial paper commercial paper has no coupon payments everything is repaid at maturity with one payment 5 bonds pay interest at regular intervals twice a year over the life of the loan 8 though both instruments result in a return of capital at the maturity date of the instrument bonds also make payments along the way another potential difference between the two is the collateral requirements for long term bonds investors will often want security that if something were to happen they have the first right to claim company assets therefore many bonds may be secured while the riskiest bonds may more closely mirror commercial paper by being unsecured example of commercial paperlet s say a retail firm is looking for short term funding to finance some new inventory for an upcoming holiday season the firm needs 10 million it offers investors commercial paper with a face value of 10 1 million this is in line with prevailing interest rates 