Commercial paper

Commercial paper is a short term IOU that a company sells to investors to borrow money for a few days or months, and in the US for no more than 270 days. It is unsecured, meaning no specific assets back it, and it usually pays no interest coupon. Instead it is sold at a discount to its face value and repaid in full at maturity, so the investor's return is the difference between the two.

Because buyers rely only on the issuer's creditworthiness, the market is mostly open to large companies with high credit ratings, which use it to fund day to day needs such as inventory and payroll more cheaply than a bank loan. On the issuer's balance sheet it counts as short term debt. On the other side, money market funds and corporate treasuries hold commercial paper as a cash like asset, and high quality paper with a short enough maturity can count as a cash equivalent.

The main risk is rollover. Most issuers repay maturing paper by selling new paper, so if the market freezes, as it did in 2008, a company can suddenly need to find the cash elsewhere, often by drawing on its revolving credit facility. For a stock investor, a company that leans heavily on commercial paper should have a backup credit line large enough to cover it. For a money market fund investor, the 2008 episode showed that commercial paper is very safe but not risk free.