What is the primary reason firms issue Commercial Paper?

Firms issue Commercial Paper primarily to provide liquidity. Commercial Paper is a short-term, unsecured debt instrument that companies use to meet their immediate financing needs. This includes funding for short-term liabilities, operational expenses, or inventory purchases, rather than long-term investments. By issuing Commercial Paper, firms can quickly access cash without the need to secure loans or rely on other forms of borrowing, which may carry higher interest rates or be more cumbersome to arrange.

The nature of Commercial Paper allows businesses to take advantage of the short-term borrowing market, often at a lower cost than other alternatives, making it an effective liquidity management tool. It typically has maturities that range from a few days to nine months, which aligns perfectly with the urgent cash flow needs that companies may face.

In contrast, using Commercial Paper for paying dividends or acquiring other companies does not fit its intended use, as these actions typically require more substantial, long-term financing. Additionally, while it can provide temporary liquidity, it is not a vehicle for financing long-term investments, which would usually involve longer-term debt options.