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When a local or state government has a need for financial support between today and the issuing of a long term bond, the anticipation note helps to fill in the gap. Essentially, an anticipation note is a short term bond that is designed to provide recognition of some sort of debt obligation currently coming due. The idea is that when the long-term bond issue begins to generate revenue, the obligation that is specified in the anticipation note will be honored and paid according to terms.
Sometimes referred to as bond anticipation notes, these types of short term bonds are not unusual at all. Generally, an anticipation note makes an appearance when there is a shortfall on anticipated revenue for some reason. This may be due to unanticipated governmental expenses, such as in the case of a natural disaster. Another example would involve the collection of less tax revenue than previously anticipated. The bond anticipation note basically confirms that there will be revenue to cover the outstanding debt within an acceptable period of time, and that a portion of that revenue is pledged to settling the debt.
It is important to note that an anticipation note cannot be issued without a thorough investigation into the current financial situation, and documentation that provides a reasonable expectation of the ability to pay. When extending an anticipation note, information about the source of the anticipated revenue, the schedule for collection, and a schedule of payments for retiring the debt are often included. Most often, the anticipation note is connected to a specific bond issue, so providing the data on collections and payment schedules is usually a matter of referring to documents that are already prepared. These types of supporting documents are not unlike the type of data that is required to get any type of a business loan, or to secure a promissory note.
A key characteristic of the anticipation note is that it is not a loan, nor is it a financial strategy that will work for a long term situation. The anticipation note is also not meant for use as a means of putting off creditors when there is not a reasonable expectation of being able to retire the debt. However, as a means of making the most responsible use of available finances, the anticipation note can be a good way to delay expenses that are important, but do not impact the day to day functioning of the government entity.