A direct paper is commercial paper that is made available by the issuer of the paper, rather than making use of underwriters to handle the distribution. Because the direct paper is issued as a short-term debt obligation, this type of action helps to keep the distribution simple and may also help to minimize the cost of issuing the debt. Corporations tend to make use of a direct paper in order to finance projects that are likely to begin producing revenue before the debt becomes due.
To understand how a direct paper functions, it is necessary to grasp the concept of a commercial paper. The commercial paper is a debt instrument that is unsecured. A corporation may choose to issue a commercial paper as a means of managing a temporary shortfall in capital needed to maintain operations at the current level. A commercial paper may be issued to help with matters such as inventory needs, temporary financing of Accounts Receivable resources, or even the purchase of equipment. The idea behind issuing a commercial paper is to meet the immediate need while confident that resources to honor the debt will be coming in a short period of time.
Generally, a corporation issues a commercial paper through an underwriter. The underwriter manages the distribution and also acts as an advocate to make sure the debt obligation is discharged in a timely manner. This leaves the company free to focus on other important matters, such as generating the resources that will eventually be used to retire the debt.
When the company chooses to manage this process in-house, without the support of an underwriter, the commercial paper is known as a direct paper. The provisions in the offering are more or less identical to that of any commercial paper. As the name implies, a direct paper is directly issued and managed by the corporation that released the debt obligation in the first place.
The use of a direct paper is a fairly common business strategy. Companies that are financially solid may choose to make use of this approach rather than dip into their own resources. This is often the case when the need for additional funds is temporary and short-lived. Typically, a direct paper issue does not run longer than 270 calendar days before reaching maturity. In fact, it is not unusual for a direct paper to reach maturity in as little as two to three months.