Commercial paper is by definition short-term. Maturities range from just a few days up to 270 days (about nine months), with many issues around one to two months on average. Because of this brief term, commercial paper is usually issued at a discount and pays no periodic interest - investors buy it for less than its face value and receive the full face value at maturity, the difference being the interest earned. The typical denomination is large (often $100,000 or more), meaning commercial paper is mainly traded by institutions or wealthy investors.

Companies favor commercial paper for flexible short-term funding: they can issue paper as needed to cover seasonal cash needs or working capital, and then repay or roll it over within weeks or months. In fact, firms often “roll over” commercial paper (issuing new paper to pay off maturing notes) as a way to continuously finance their short-term requirements.

The funds from commercial paper are typically used to finance short-term liabilities and operating expenses. It’s essentially a way to bridge cash flow gaps. Common uses include:

In corporate finance, commercial paper serves as an alternative to short-term bank loans, often at a lower interest cost. Many financial and non-financial companies rely on it for working capital and other interim funding. For instance, nonfinancial firms use it for general working capital, while financial institutions issue it to fund things like receivables or to refinance other short-term assets. Because it is unsecured, investors demand that issuers be very creditworthy - as a result, commercial paper is mostly the realm of “blue chip” companies with high credit ratings.

When a company issues commercial paper, it is borrowing money from investors, so it records a liability on its balance sheet. The cash received increases the company’s cash (asset), and an equal amount is recorded as a short-term debt obligation. On the balance sheet, this appears under current liabilities (amounts due within one year). It may be listed as a line item called “Commercial paper” or included in a broader category like “short-term borrowings” or “notes payable”.

When a company invests its excess cash in another company's commercial paper, it appears on its balance sheet as an asset. From the investor’s perspective, commercial paper is a short-term investment instrument. If a company holds commercial paper issued by another entity, it records it in the current assets section of the balance sheet.

Depending on the maturity and accounting policies, these holdings might be categorized as “Cash and cash equivalents” (if maturities are three months or less) or as “short-term investments/marketable securities” (if slightly longer). In either case, commercial paper held as an investment is considered a highly liquid asset, easily convertible to cash with minimal value risk due to its short maturity and the high credit quality of the issuer.

For companies with the credit standing to issue it, commercial paper provides flexible, low-cost financing. The interest (or discount) rate is generally lower than rates on bank loans, which makes it an attractive option. Companies can tap the commercial paper market to raise cash quickly without the lengthy process of arranging a bank credit line. This is especially useful for managing liquidity, such as financing inventory build-up for a seasonal sales period.

From a broader perspective, commercial paper is a key component of the money market. It connects companies in need of short-term cash with institutional investors (like money market funds) looking for a safe, liquid place to park cash. The ability to issue commercial paper is a sign of a company’s financial strength and credit quality.