Question

A common practice for government entities, particularly schools, is to issue short-term (promissory) notes to cover daily expenditures until revenues are received from tax collection, lottery funds, and other sources. School boards approve the note issuances, with repayments of principal and interest typically met within a few months.

The goal is to fully cover all expenses until revenues are distributed from the state. However, revenues distributed fluctuate due to changes in collection expectations, and schools may not be able to cover their expenditures in the current period. This leads to a dilemma—whether or not to issue more short-term notes to cover the deficit.

Short-term debt may be preferred over long-term debt when the entity does not want to devote resources to pay interest over an extended period of time. In many cases, the interest rate is lower than long-term debt, because the loan is considered less risky with the shorter payback period. This shorter payback period is also beneficial with amortization expenses; short-term debt typically does not amortize, unlike long-term debt.

What would you do if you found your school in this situation? Would you issue more debt? Are there alternatives? What are some positives and negatives to the promissory note practice?

Answer 1

PROMISSORY NOTES:

A promissory note is a financial instrument that contain a written promise by one party to pay another party, a difinite sum of money , either on demand or at a specified period on some future date.

If shortage of fund then taken but also considered to be recover in the period, suggested

Various points to be considered under this school situation and decision is taken by considereing all the views. it is an legal instrument. thee are various types of promissory note like personal promissory note, commercial promissory note, real estate promissory note, investment notes.

As per question school issued promissory note to cover up there daily expenditure . AIM is to cover when it is distributed from the state.

short term debt is considered to be preferred over the long term debt, as the interest payment not to be paid for extension period of time.

There are various benefit of issuing promissory notes:

- We are in position to use note to borrow money when the company does not have beter credit rating to obtain a commercial business loan from a bank or other financial instutions.

- it help to avoid pledging property as collateral, as secured promissory note.

- it help in payment of some repayment assurance to friends or other person who needed.

- it helpful in various aspect.

- If anyone need money it can sell , or borrow against , the note.

There are various limitation of the notes also:

- payment of interest is generally higher compared to secured loan.

- higher interest rate is considered as credit rating is lower and using promissory notes.

- When lumsum payment is due and fund is not available than it is difficult situation.

- An unsecured note have greater risk.

- Recovery in the court is very difficult.