Commercial Paper Defined

Excerpted from "What Every Lender Needs to Know About Working Capital Lending"

Each stage of the supply chain is evidenced by some form of paperwork. Paperwork that carries a definable monetary value whose rights can be transferred to a third party is defined as commercial paper.

Commercial Paper

There are varying types of commercial paper such as:

• Chattel paper, which involves the distribution of goods across state and/or country lines.
• Evidences of indebtedness from one merchant to another, commonly known as a receivable to the seller and a payable to the buyer.
• Warehouse receipts evidencing inventory that is being stored in definable quantities with a market price in a secure location.

Commercial paper continues to evolve as an explosion in the electronic World Wide Web has come to play a bigger role in the supply chain.

Credit Quality

Most lenders think it would be an administrative nightmare to apply customary credit criteria to commercial paper such as accounts receivable. Therefore, they do not take such precautions even though credit evaluations occur in every other type of lending.

Normal procedures of determining a credit score should be applied to the commercial paper securing a working capital loan as well. Of course the implementation of such a credit criteria would need to be automated since the credit score would be different on each piece of commercial paper since the transactions that occur between the participants all have varying credit quality.


Commercial paper is highly liquid. By its nature, it relates to transaction flows that usually involve days, sometimes months, and very rarely, years. Because these assets are considered very liquid, they tie very well with short-term lending programs. Ideally, a company who is trying to eliminate their cash flow gap will use short-term liquid assets to deal with the cash flow gap and support and sustain the long-term viability of the business with infrastructure related loans to land, building and equipment that are focused on long-term objectives.

This combination of short-term versus long-term assets in securing working capital transactions creates challenges for some businesses because lenders tend to disregard commercial paper or highly liquid collateral as a viable asset to secure a short-term transaction because of the perceived administrative nightmare of securing the process.

Ideally, lenders would give more emphasis on securing their working capital based loans with liquid collateral and support the overall relationship with a particular borrower with long-term collateral as ancillary collateral to the transaction.