Can a business ever be too small to issue commercial paper?
There are effective – though not legal – restrictions on the size of commercial paper issuers. Any company can issue commercial paper. As of 2015, commercial paper with less than 270 days’ maturity doesn’t have to be registered with the Securities and Exchange Commission.
Without any legal restrictions on commercial paper issues, the market itself dictates when a business is too small or not creditworthy enough to issue acceptable paper. Issues aren’t worth anything if there aren’t any buyers.
Normal Issuers of Commercial Paper
The majority of commercial paper issues are made by large companies with top credit ratings. In fact, only top-rated (AA or higher) paper even receives a listed rating in markets in the United States. Lower-rated paper is sometimes sold, but at rates far above the standard rate.
Financial institutions dominate the commercial paper market. As of 2002, financial institutions issued nearly 90% of rated commercial paper outstanding.
Commercial Paper and Company Size
As a general rule, small businesses have less access to credit than large businesses. This is particularly true with unsecured credit, since creditors want to make sure they borrow from reputable companies with large revenue streams. Larger businesses have better relationships with banks and other financial institutions. All of these factors create de facto limits on the average size of commercial paper issuers.
Even though small businesses can legally issue commercial paper, they may not want to expose themselves to risk. The standard increments of paper issues are $100,000, which wouldn’t look very good on a small company’s balance sheet.
Unsecured and Unregulated Risks
When investors and creditors are unprotected by regulations (through the SEC) or bankruptcy proceedings, they are forced to be more careful when lending money. This is the main reason that large, highly rated companies rule the commercial paper market.
Even if a small company offered a higher interest rate, most commercial paper buyers would side with less-risky large firms. The lack of an effective backstop pushes buyers toward larger, known commodities.