Commercial paper—also referred to as “bills of exchange”—is a common intercompany financing instrument used by large French companies. As a negotiable debt security (TCN), it allows companies to obtain cash quickly to meet short-term liquidity needs through the money market, rather than through a traditional bank loan.

In this article, we explain commercial paper, including how it works and its advantages. We also outline which companies can issue commercial paper and how.

What’s in this article?

• What is commercial paper?
  
• Who can issue commercial paper?
  
• Why issue commercial paper?
  
• What are the advantages of commercial paper?
  
• What are the disadvantages of commercial paper?
  
• Issuing commercial paper
  
• Repaying commercial paper
  
• How Stripe Tax can help
  

What is commercial paper?

Commercial paper is a TCN created in France in 1985. It is a type of short-term intercompany credit issued by companies seeking to obtain liquidity quickly. It can then be traded on the money market with various economic agents (e.g., other companies, banks, insurance companies) to obtain funds.

Commercial paper is currently sold as Negotiable European Commercial Paper (NEU CP) and has the following characteristics:

• It is issued for a period of between one day and one year, with an average duration of less than three months.
  
• Each commercial paper issued must be in the amount of at least €150,000.
  
• Its rate can be fixed or variable, depending on the company’s needs and market conditions.
  

Commercial paper is strictly regulated in France by the Monetary and Financial Code (Code monétaire et financier), the Financial Markets Authority (Autorité des marchés financiers, or AMF), and the Bank of France. Rating agencies—such as Moody’s and Fitch—also play an important role. They evaluate investment risk for commercial paper by assigning a rating to the issuing company using multiple criteria (i.e., credit rating, financial solvency, repayment history).

What is the difference between commercial paper and a certificate of deposit?

Commercial papers are TCNs issued by nonbank entities. Certificates of deposit are TCNs issued by banks or the Deposits and Consignments Fund (Caisse des dépôts et consignations, or CDC). Both are issued for a period of less than or equal to one year.

Who can issue commercial paper?

Except for banks, any company that has existed for at least two years can issue commercial paper. Commercial paper is primarily used by large private or publicly traded French companies in need of cash. For example, this was the case for the Électricité de France (EDF) Group. It issued its first commercial paper to refinance renewable project investments in 2024.

However, other entities can issue commercial paper as well, including securitization and investment companies, economic interest groups, the national government, local governments, and the Central Agency for Social Security Organizations (Agence centrale des organismes de sécurité sociale, or ACOSS). A bank can also issue commercial paper to comply with regulatory requirements related to liquidity ratios. For example, the Pays de la Loire Region issued approximately €200,000,000 in commercial paper in 2020.

Why issue commercial paper?

For businesses, commercial paper is an advantageous short-term financing solution. It allows companies to access funds quickly while avoiding the traditional banking system (e.g., bank loans, short-term credit) and at more attractive interest rates.

As with cash advances or reverse factoring, commercial paper is a response to an urgent need for cash due to the following:

• Negative cash flow
  
• Long payment delays
  
• Period of peak activity
  
• Short-term investments
  
• Immediate financial obligations
  

For companies with excess cash, purchasing commercial paper allows them to benefit in the short term from an attractive investment.

What are the advantages of commercial paper?

For issuing companies, commercial paper provides multiple advantages:

• Prompt access to cash: This can help businesses respond to temporary needs for cash and improve cash management in the short term.
  
• Flexible deadlines: Issuers set due dates according to their financing needs.
  
• Flexible currency: Issuers can issue commercial paper in euros or any other currency.
  
• Availability to companies of all sizes: This enables small and medium-sized enterprises (SMEs) to issue commercial paper in response to liquidity needs while complying with the €150,000 minimum.
  
• Lower financing costs: Costs are lower than for short-term bank loans or credit lines with interest rates that are often also lower.
  
• Diversified financing sources: Businesses can receive financing without being dependent on banks.
  

This type of debt security also offers several advantages to companies that buy commercial paper:

• Commercial paper is a relatively low-risk investment because it is issued by companies that are generally well established with good credit scores and financial health.
  
• Once purchased, commercial paper can be sold or exchanged until its due date. This can result in a profit.
  

What are the disadvantages of commercial paper?

Commercial paper also has some disadvantages. The main downside is the risk of repayment difficulties if there are market disturbances, significant interest rate fluctuations for commercial paper, or cash flow issues. In these cases, the issuing company can have difficulties refinancing its commercial paper when it comes due. This could encourage the company to seek other sources of financing, impacting its credit score and solvency.

Although investment risk is relatively low, it still exists for entities that purchase commercial paper. Those purchasing it must also be able to assume the risk that the issuer is not able to repay the principal and interest on the due date. In addition, these investors must take possible interest rate fluctuation into account. If interest rates increase, the commercial paper’s value decreases, leading to potential losses.

Issuing commercial paper

For a company in need of cash to issue commercial paper, it must follow several steps:

• Provide the Bank of France with financial documentation that presents a plan for issuing commercial paper and summarizes its business activities and financial situation. It must also disclose the individuals involved in the process. The Bank of France registers the plan and sets the conditions for circulating commercial paper.
  
• Prepare a contract including five required items: amount (with a minimum of €150,000) and duration of the commercial paper (up to one year), applied interest rate, guarantees, and repayment conditions.
  
• Receive a good rating from an accredited rating agency. This depends on the company’s credit score, solvency, and reputation in the financial markets.
  
• Once these conditions are met, issue commercial paper and negotiate it on the money market, whether the commercial paper is regulated or by mutual agreement.
  

The commercial paper can then be purchased by various financial actors (e.g., banks, insurance firms, companies, and public institutions through central banks and public treasuries). They retain ownership and can sell it until its due date. On its due date (i.e., maturity), commercial paper must be bought back by the issuing company. The company reimburses both principal and interest.

Repaying commercial paper

The company issuing commercial paper must buy it back on its due date, paying the investor for both the principal and interest. Therefore, there is no repayment schedule. However, depending on their financial situation, the issuer can propose early repayment to reduce interest due.

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