When I sit with someone who is new to debt markets, I usually start commercial paper (CP) with a very ordinary comparison: it is like a company taking a short, purpose-driven “cash bridge” to get from today to the next expected inflow. CP is a short-term borrowing instrument used by well-rated issuers to manage working capital. In most cases, it is unsecured, issued for short maturities (often a few weeks up to one year), and commonly structured as a discount instrument—the investor buys it below face value, and the issuer repays the full face value on maturity. The difference becomes the investor’s return.

That is the framework. But CP makes the most sense only when I connect it to real situations companies face.

A simple example of commercial paper is a large FMCG company heading into a peak demand season—festivals, promotions, and heavy stocking at distributor points. Inventory purchases increase first, and cash collections follow later. The company could use a bank line, but it may prefer issuing a 60–90 day CP because the requirement is temporary and predictable. The CP helps it pay suppliers on time, maintain momentum in distribution, and then get repaid when sales collections flow back in. In my mind, CP here is not “funding for growth”; it is funding for timing.

Another example of commercial paper comes from NBFCs. Think of an NBFC that has strong collections, but those collections arrive in small, daily repayments while loan disbursements happen in larger lumps. If the NBFC wants to disburse a chunk of loans today, it may issue 30–180 day CP to fund that gap, and repay it through incoming instalments and planned refinancing. In good market conditions, CP can be an efficient way to manage near-term funding without committing to long tenors.

Manufacturing businesses offer another practical use case. Suppose a manufacturer has shipped goods to a large corporate customer and expects payment in 90 days. Meanwhile, the manufacturer still needs cash this month—raw material purchases, electricity bills, wages, and vendor payments do not wait. Issuing CP can help the company keep operations running smoothly while it waits for receivables to convert into cash. This is a very typical reason companies use CP: they are not short of profitability, they are short of timing.

I also see CP being used by companies that want flexibility. A firm may plan to refinance short-term borrowings or anticipate a planned inflow—such as a tax refund, an asset sale, or a milestone payment on a contract. CP allows them to match borrowing to that specific window, instead of stretching a short need into a long loan.

From an investor’s lens, I keep CP evaluation grounded. Because it is unsecured and short-term, I focus on things that reveal a company’s ability to repay and refinance: the issuer’s rating, liquidity buffers, cash-flow quality, banking relationships, and how dependent the issuer is on repeatedly rolling CP. If the business relies heavily on issuing new CP every few months just to repay old CP, refinancing risk becomes a real consideration, especially when market liquidity tightens.

Finally, I like placing CP in the broader fixed-income learning curve. Even if your eventual goal is to buy bonds for longer-term cash flows, understanding CP helps you understand how companies manage their short-term balance sheet and why short-term rates can influence broader credit markets.

In summary, the best way to understand CP is through situations you can picture: seasonal inventory build-up, receivable-led gaps, or short-term refinancing. Every example of commercial paper points to the same idea—smart working-capital management—done with an instrument that is designed for speed, flexibility, and short tenors.