Direct issuers are businesses that chose to sell commercial paper themselves, rather than sell the paper through the use of a brokerage service. This allows the company to interact directly with retail investors who desire to obtain a portion of the issued securities. Direct issuers may use this approach then there is a need to generate revenue to handle some sort of short-term situation or project.
In order to understand why a company may choose to function as a direct issuer, it is important to understand what is meant by a commercial paper. In most cases, commercial papers are short-term debt obligations that are created to address a specific task that the company considers desirable, but does not want to tie up other assets in order to perform the task. One example of a commercial paper is the promissory note, which often is a simple unsecured debt obligation with a life of no more than nine months.
The intent of a direct issuer is to honor the commercial paper within the time frame specified in the transaction. This is often anticipated to take place by using revenue generated by project or task that was funded with the proceeds from the issuing of the debt obligation. However, it is not uncommon for a direct issuer to be a company that is already extremely profitable and certainly has resources on hand to cover the debt in the event the project does not yield enough profit by the time that the commercial paper reaches maturity. For this reason, a retail investor can often deal with a direct issuer with a very low degree of risk involved.
As with many types of investments, the commercial paper that is offered by the direct issuer provides the opportunity for investors to earn a return on the purchase of the paper. This return is usually received after the paper reaches full maturity. At that point, the direct issuer pays back both the principle and any interest that is due on the note. While the return is often worth the effort of the investor, it is usually not a spectacular amount of earnings. Still, the low degree of risk involves makes this type of transaction attractive to investors who are more conservative in their investing habits.
