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What Are Short-Term Notes?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 July 2014
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Short-term notes are debt obligations that are scheduled for repayment within a relatively short period of time. Notes of this type may be in the form of municipal bonds, personal loans, and even financial documents issued by state and national governments. There are several advantages associated with the use of short-term debt notes, with both the lender and the debtor usually benefiting from the transaction.

Municipal bonds are one of the more common types of short-term notes. Bonds of this type are often issued as a means of securing funds today that can be used for some sort of civic project. The duration of the bond is usually determined by when the municipality expects to have the funds in hand to pay off the debt obligation. Normally, the repayment plan calls for issuing a maturity date that will occur shortly after the collection of taxes or some other form of revenue that the city expects to utilize in retiring the debt.

In like manner, businesses sometimes make use of short-term bank notes to fund a project, such as launching a new advertising campaign or developing a new product. Short-term corporate notes are structured to not come due until the project begins to generate revenue, making it possible to pay off the balance of the loan without touching the other assets of the company. By using this strategy, the business does not have to divert assets or make any long-term financial obligations in order to fund the project.

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In the United States, short-term Treasury notes are another example of these types of notes. In general, the notes are scheduled to mature anywhere from three months to a year. In the interim, the short-term notes generate considerable revenue that can be used for a wide range of government functions and projects.

Both investors and the issuers of short-term notes benefit from this type of financial instrument. For the investor, the rate of return is usually somewhat higher than other investment options carrying a similar degree of risk. Issuers have the advantage of obtaining much needed revenue today, with the luxury of paying off the debt obligation on a schedule that is convenient and will not cause disruption with any other operations currently maintained by the entity. In general, short-term notes will not have a maturity or due date past two years, although some financial professionals will classify loans and bonds that mature within five years as a short-term debt instrument.

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Discuss this Article

MrMoody
Post 4

@everetra - I know nothing about short term house notes, but I do have a story to tell about short term housing. One of the guys where I work suffered a fire in his house, because of a careless spark set off by a smoker in dry weather.

The winds created an inferno that swept through his neighborhood and almost completely destroyed his house while the firefighters fought the blaze.

Anyway, his insurance provided him with short term housing nearby while they worked out the arrangements on his old house. It was all paid and they provided laundry service and other amenities.

It doesn’t take away the pain of seeing your old house reduced to ashes, but it helps you to start a new life.

everetra
Post 3

@allenJo - The interest payments came out to $500 per month (we had the old note for four months). Multiply that by twelve notes and you get the idea of how much it would cost. It’s an expensive proposition, indeed, and I’m not exactly recommending it.

If the property didn’t sell within a year, the bank could offer to refinance again for another year. Again, that’s more money out of our pocket. If it still doesn’t sell, then we have to revert to a traditional mortgage arrangement. I’m a bit hazy on how it would work out; perhaps I should have paid more attention.

However, as I said, the old house was paid off. Further we lived in a good neighborhood and it was a small house, so it was perfect for first-time home buyers. Also at the time the government was offering home buyer tax credits, which sweetened the pot too.

allenJo
Post 2

@everetra - I’m shocked-and frankly, this is the first time I’ve ever heard of a bridge loan. You mean you basically put your old house on hock so you could borrow for the new house?

What would happen if the old house didn’t sell-would the bank seize your property? You’re a brave soul, indeed. Also, how much would you owe if it took your house a whole year to sell?

everetra
Post 1

When we wanted to buy our new house, we didn’t want to wait to sell our current house before moving. Friends warned us against buying the new house before selling the old house.

I heard horror stories about others who had done the same, only to see the old property stay on the market for a year before selling it.

However, our old house was already paid off. So we took out a bridge loan, a short term note payable to the bank within one year, providing us closing money (including down payment) for the new house, based on the equity in the old house.

Yes, it was risky, but our house sold within three weeks. We paid off the note quickly, although we did cough up $2,000 in interest payments. It was worth it, though, as we had enough profit from the sale of the house to take the hit.

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