This comprises obligations that will mature within a year. Most often short-term debt is assumed to provide temporary or interim funding. Short-term debt may be used for the following purposes:
Cash to initiate or begin a project
Provision of cash as an interim financing means to await improved market conditions before issuing long-term debt
Start-up cash for initial construction
Provision of cash as a stopgap measure while resolving financial problems
Provision of cash to accommodate under budgeted expenditures
Minimizing cash flow fluctuations'
There are a number of short-term instruments used to generate cash to meet expected spending needs. The following are three important instruments with which financial managers should familiarize themselves:
- Tax anticipation notes (TANs) are used to meet shortfalls occasioned by lags in tax collection; the anticipated revenue is used as security or pledged for the bank's advancing the loan.
- Revenue anticipation notes (RANs) are used to provide cash to overcome lags involved in receipt of intergovernmental revenue. The anticipated revenues are pledged as security for the cash advance. Upon receipt of the revenues the loan is repaid.
- Bond anticipation notes (BANs)are used to generate funds to initiate a capital project, especially in cases in which interest rates are volatile. In such situations, it may be necessary to wait until interest rates stabilize for long-term debt issues.