Anticipation notes, also known as forward note bonds, are short-term bonds used by local or state governments to bridge financial gaps until long-term bonds generate revenue. They require thorough financial investigation and documentation, and should not be used as a long-term financial strategy or to delay debt payments.
When a local or state government needs financial support between now and issuing a long-term bond, the anticipation note helps bridge the gap. In essence, an advance note is a short-term bond designed to provide acknowledgment of some sort of debt obligation that is currently maturing. The idea is that when the long-term bond issue begins to generate revenue, the bond specified in the forward note will be honored and paid according to the terms.
Sometimes referred to as forward note bonds, these types of short-term bonds aren’t all that unusual. Generally, an advance note appears when there is a shortage of advance revenue for some reason. This may be due to unforeseen government expenditures, such as in the event of a natural disaster. Another example could be collecting less tax revenue than previously expected. The bond advance note essentially confirms that there will be revenue to service outstanding debt within an acceptable timeframe, and that a portion of that revenue is committed to paying off the debt.
It is important to note that an advance note cannot be issued without a thorough investigation of your current financial situation and documentation that provides a reasonable expectation of ability to pay. When extending an advance note, information about the projected source of revenue, the schedule for collection, and a payment schedule for debt relief is often included. Most often, the advance note is linked to a specific bond issue, so providing data on receipts and payment schedules is usually a matter of referencing pre-prepared documents. These types of supporting documents are not dissimilar to the type of data required to obtain any type of business loan or to secure a promissory note.
A key feature of the forward note is that it is not a loan, nor a financial strategy that will work for a long-term situation. The advance note should also not be used as a means of putting off creditors when there is no reasonable expectation that you will be able to pay off the debt. However, as a means of making more responsible use of available finances, the advance note can be a good way to delay expenses that are important, but do not affect the day-to-day functioning of the government entity.
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