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Short-Term Financing

Loans from local banks often represent a good alternative for funding the preliminary costs for large projects or the entire cost for small projects. Large and small are, of course, relative terms and will depend upon your authority's financial resources, the size of your community and other similar factors. Probably the best way to decide whether or not a bank financing is right for you is to ask how soon the bank can be repaid. If the answer is less than five years and the amount of money involved is within the lending limit of your bank, a bank loan probably represents the most cost-effective and readily available source of financing.

Bank loans do not need to be repaid solely from customer revenues. They may be repaid from the proceeds of another loan. Short-term debt is frequently repaid when a project's permanent financing is settled. The magic behind repayment over five years is that many banks do not like to make long-term loans at tax exempt fixed interest rates. Usually, the loan amount represents a fairly substantial percentage of the banks local lending, and there are many variables that bankers need to consider when making a tax exempt interest loan. One significant variable they must consider is the possibility of future changes in the U.S. tax laws or the treasury's arbitrage regulations. These changes could have an adverse impact on the profitability of these types of loans.

For projects that require a larger amount of money than can be comfortably borrowed from the local bank, regional banks are typically a good source. The authority may also choose to sell short-term project notes. Again, payment in two to five years may be made either from revenues (like tapping fees or front-foot assessments) or by including the amount in a long-term borrowing. Often, interest on the loan or notes is included in the borrowing.

Short-term notes are generally issued to provide large amounts of money to undertake a project through some prescribed milestone or to finance several smaller projects over a period of several years. For very large projects where preliminary costs may exceed $1,000,000.00, the notes may be issued to pay these costs and then refinanced as part of a permanent financing after construction bids have been received. Under some circumstances, the authority may wish to borrow enough money to provide for both the preliminary costs and the construction of the project. This may be useful if the permanent financing is being provided by some federal or state agency, if there are several stages to a project, or there are other circumstances that make calculation of the long-term debt amount uncertain.

Short-term notes are not a financing vehicle for everyone, however, since very stringent treasury regulations govern the issuance of such debt. The state may limit such notes if they must be guaranteed by your sponsoring municipality or municipalities. Also, the success of such a financing is dependent upon specific marketing conditions including the size and credit worthiness of the authority, issue size and the general economic forecast and activity.

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