businessman with a folder
When a state or local government needs financial support between now and the issuance of a long-term bond, the advance note helps bridge the gap. Essentially, an advance note is a short-term security designed to provide recognition of some type of debt obligation currently due. The idea is that when the long-term bond issue begins to generate income, the obligation specified in the advance note is honored and paid according to the terms.
Sometimes called bond anticipation notes, these types of short-term bonds are not uncommon. Generally, an anticipation note appears when there is a shortfall in anticipated income for some reason. This could be due to unforeseen government spending, such as in the case of a natural disaster. Another example would involve raising less tax revenue than previously anticipated. The bond’s prepayment note basically confirms that there will be proceeds to cover the outstanding debt within an acceptable period of time, and that a portion of those proceeds will go toward paying off the debt.
It is important to note that advance notice cannot be issued without a thorough investigation of the current financial situation and documentation that provides a reasonable expectation of ability to pay. When writing a prepayment note, information about the expected source of income, the collection schedule and a payment schedule to redeem the debt is usually included. Most of the time, the advance note is linked to a specific bond issue, so providing the data on collection and payment schedules is usually a matter of referring to ready-made documents. These types of supporting documents are no different from the type of data needed to obtain any type of business loan or to secure a promissory note.
A key feature of the advance note is that it is not a loan, nor is it a financial strategy that will work in a long-term situation. The prepayment note is also not intended to be used as a means of deferring to creditors when there is no reasonable expectation of being able to repay the debt. However, as a way to make the most responsible use of available financial resources, advance notice can be a good way to delay expenses that are important, but do not impact the day-to-day operations of the government entity.