Direct documents are business documents issued by the company itself, rather than through underwriters, to fund short-term projects and minimize costs. They are similar to commercial paper, which is an unsecured debt instrument used to manage temporary capital shortfalls. Direct documents are managed internally and typically mature in less than 270 days.
A direct document is a business document made available by the issuer of the document, rather than using underwriters to handle the distribution. Since the direct document is issued as a short-term debt obligation, this type of action helps keep distribution simple and can also help minimize the cost of issuing the debt. Companies tend to make use of a direct document to fund projects that are likely to start generating revenue before debt is due.
To understand how a direct paper works, it is necessary to understand the concept of commercial paper. The commercial document is an unsecured debt instrument. A company may choose to issue a commercial document as a way to manage a temporary shortfall in capital needed to maintain operations at the current level. A business document can be issued to help with issues such as inventory needs, temporary funding of Accounts Receivable resources, or even the purchase of equipment. The idea behind issuing a commercial document is to meet the immediate need, while the resources to service the debt will arrive in a short period of time.
Generally, a company issues a commercial document through an underwriter. The underwriter manages the distribution and also acts as an advocate to ensure that the debt obligation is met in a timely manner. This leaves the company free to focus on other important matters, such as generating the funds that will eventually be used to pay off the debt.
When the company decides to manage this process internally, without the support of an underwriter, the business document is known as a direct document. The offering’s provisions are more or less identical to those of any commercial paper. As the name implies, a direct document is issued and managed directly by the corporation that released the debt obligation in the first place.
Using a direct document is a very common business strategy. Companies that are financially sound may choose to use this approach instead of using their own resources. This usually occurs when the need for additional funds is temporary and short-lived. Typically, a paper-based issue lasts no more than 270 calendar days before reaching maturity. In fact, it’s not uncommon for a direct article to reach maturity in less than two to three months.
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