A project note is a debt obligation that is sometimes used to provide the initial financing for some type of project. This type of debt is usually short-term, meaning that it is paid off within twelve months. Businesses, municipalities and other entities make use of this type of short-term debt obligation to launch and maintain a project up to the point where it is anticipated to begin generating enough revenue to sustain the project for the remainder of its developmental period.
The use of a project note has several advantages. One has to do with limiting costs associated with the project. A debt of this type is often extended with a highly competitive rate of interest, since the lender is not assuming risk over a long period of time. Thus, the borrower can divert more available capital toward other endeavors, rather than repaying a larger amount in interest. In addition, the note normally requires little time to be approved. As a result, there is no long-term debt to repay, and no need to spend a great deal of time and effort researching other funding options.
Another benefit to the project note is that this device can be used to fill in the gap between the present date and the date when the borrower anticipates the receipt of a large infusion of cash. For example, a municipality may take out a project note to fund an ongoing urban renewal program until state or federal funds earmarked for that program are received. The money received from the note allows the program to continue operating without interruption. Once the funds are in hand, a portion of those funds can be used to retire the debt, and the remainder used to continue the operation of the program.
In most cases, the terms and conditions that govern a project note limit the use of the funds for a specific project. This means that the borrower cannot receive the funds on the basis of using them to buy a piece of equipment, then divert those funds to purchase real estate of some kind. A requirement of this type is to the benefit of both parties. For the lender, the provision minimizes the chance of the funds being used for an activity that creates additional risk to the loan. At the same time, the borrower avoids the possibility of rashly choosing to use the funds to underwrite some other activity that ultimately fails to yield a return, and thus create additional financial hardship.
