So we continue to hear about the credit crisis - and a lot fo that talk continues to center around the commercial paper market. When we hear problems about liquidity in the market, etc. the reference is often to this short term paper market - not the longer term loans and lines of credit that middle market companies rely on.

So what is commercial paper? And why is it important? Simply explain, its a short term loan used to finance operations. Although it can take several forms, it is a security instrument that matures in under 270 days and is exempt from SEC oversight. Large corporations and financial institutions are able to issue paper - in return for the promise of repayment and a yield - much more cheaply than they could access a line of credit from a bank.

At issue, now, is that that market has evaporated for all but the strongest companies, and liquidity at the far end of the yield curve is much more effect. This is highlighted by the current run on the Fed's "borrowing window," which as of Friday (October 4) had loaned $348b to banks. With the commercial market frozen, they are forced to tap the Fed lending window to access short term liquidity.

And here is the trickle down effect: on the corporate side, triple A rate companies such as General Electric are able to still sell, but others are having bigger problems. Those that cannot go to banks. According to Bloomberg, "Lenders are balking at offering cash for longer than a day even as central banks pump an unprecedented amount of money into the banking system." Companies then, in turn, must tap more expensive lines of credit.

And thus the trickle-down effect: with large corporations facing increased financing expenses and a working capital crunch, smaller companies can expect:

• Less favorable AR / AP terms
• Increased financing expenses
• More difficulty / scrutiny accessing lines of credit, etc