Money can be borrowed from:
- Banks
- Public investors through the capital markets
- The federal government through loans or programs
- State government through loans or programs
Depending on the project being financed, debt will be repaid from either:
- Property taxes
- Sales taxes
- Usage fees
- Special assessments
- School taxes
- Revenues of the project
Short term debt (less than one year / 270 days) is used to pay for interim financing needs to cover temporary cash flow shortfalls. Lines of credit are a form of short-term debt used by organizations.
Organizations generally use long-term debt to finance major projects. The length of this debt ranges widely from 5-40 years. Forms of long-term debt include general obligation bonds, revenue bonds, or special assessment debt.
The longer payback period for the debt results in lower payments, reducing the annual cash flow impact of the debt to the organization.
Example:
An organization would like to pay for a large project but doesn’t have the money in its budget or enough cash on hand to pay for the project. The organization can borrow money from various sources today to pay for the project and then repay the borrowing over time, plus interest. The borrowed money represents debt for the organization until it is repaid.
What’s important here?
Many different organizations borrow money for a variety of reasons. The type of debt used by those organizations depends on the project and the revenues available to repay the debt.
Short-term debt can cover interim cash flow needs, while long-term debt is generally used for major capital projects, such as infrastructure or buildings. Borrowing money allows organizations to start projects sooner versus having to save up the money to pay for the project.
