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A direct paper is commercial paper made available by the issuer of the paper, rather than using subscribers to manage distribution. Since direct paper is issued as a short-term debt obligation, this type of action helps simplify distribution and can also help minimize the cost of debt issuance. Corporations tend to use direct paper to finance projects that are likely to start generating revenue before the debt is due.
To understand how direct paper works, it is necessary to understand the concept of commercial paper. Commercial paper is an unsecured debt instrument. A company may choose to issue commercial paper as a means of managing a temporary shortage of capital needed to maintain operations at current levels. Commercial paper can be issued to help with issues such as inventory needs, temporary financing of Accounts Receivable resources, or even equipment purchases. The idea of issuing commercial paper is to satisfy the immediate need and, at the same time, ensure that the resources to honor the debt arrive in a short period of time.
Generally, a company issues commercial paper through an underwriter. The underwriter manages the distribution and also acts as attorney to ensure that the debt obligation is settled in a timely manner. This leaves the business free to focus on other important matters, such as generating funds to be used to pay down debt.
When the company chooses to manage this process internally, without the support of an underwriter, the commercial paper is known as direct paper. The provisions of the offer are more or less the same as for any commercial paper. As its name implies, a direct paper is issued and managed directly by the corporation that discharged the debt obligation in the first place.
Using plain paper is a fairly common business strategy. Financially strong companies may choose to use this approach instead of drawing on their own resources. This usually happens when the need for additional funds is temporary and short-lived. A paper direct issue generally lasts no more than 270 calendar days before it expires. In fact, it’s not uncommon for a direct role to mature in just two or three months.