Understanding Different Financing Options for your Company

Posted by D&V Accounting Services
Feb 16, 2015
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If you’re looking to fund your company’s future expansion or growth ventures, it may be best to investigate getting a company loan.  

 
What is a Company Loan? 

 
Companies can get loans through different financing options. It is an ideal strategy for obtaining that much-needed business capital. By increasing your cash flow through a loan, your business becomes empowered to buy more materials for production and bring in more people to expand the company’s operations, among many others.  

But before jumping into the available financing options, you must understand the difference between short-term and long-term financing. 

 

Read: How Can Financial Wealth Management Benefit your Company 
 

Understanding the Difference Between Short-term loans and Long-term loans 

 

In a nutshell, we may explain the difference between the two by understanding the length of time you're obliged to pay the debt:  

  • For short-term loans, the duration is usually less than one year.  
  • For long-term loans, you have over a year to pay the loan.  

Initially, you might think that the duration and frequency of debt payment are the only things to consider.  

But if you look at it closely, you will see that choosing between a short-term and a long-term loan also has an implication on your business accounting and tax liabilities. 

 

 
Preparing for a Company Loan 

 

Proper Bookkeeping  


Working out your critical business numbers with an accountant demands a distinct familiarity with your assets and liabilities. Your assets are the things that your business owns while your liabilities are the things that your business owes. 
 
As expected, you need to present a list of your assets and liabilities to your accountant to pave the way for an accurate calculation of your business’s net worth.  
 
This financial data shall also be reflected in your financial statements. Therefore, your books will always be affected by your loans. 

 
Fixing your Taxes 

So, how does your choice of loans affect your tax liabilities? Here’s a simple explanation: When you choose short-term financing, the assumption is that you will pay the debt within the current business operating cycle.  
 
Therefore, when your company’s liquidity is calculated, your payment for the loans will come up and affect your cash flow. And since your debt payments can also be deducted from your income, then it will also have an impact on the computation of your income tax. 

Meanwhile, when you opt for long-term loans, the debt you owe runs on a multi-year payment term. This means these debts are not included in the monthly analysis of your cash flow.  

 


 
Moreover, the tax payments also have different tax implications, depending on the nature of the loan. 
 
Finally, you also have to consider tax codes. These tax codes demand businesses to extend deductions that your company is entitled to due to the duration of the loan or the cost of the asset purchased during the time the loan was made.   

In the end, there are many different facets to choosing a loan. Clearly mapping out what the loan will be used for is a good way to help you decide. Short-term loans are good for short-term goals while long-term loans are ideal for long-term goals. 

 

Read Next: Behind the Engagement: The Accounting Outsourcing Process  

 

Need Help in Navigating your Company’s Financing Options?  

 
We have a wide expertise in handling the numbers of companies across various industries. We also make it our duty to stay up to date on the latest trends in the accounting industry to make sure our clients’ data is safe with us. Contact us today and we’ll help you find the right solution for your needs.  

Download our Outsourcing: How to Make it Work guide today to discover how we can help in managing your company’s finances.   

 

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START YOUR ACCOUNTING OUTSOURCING JOURNEY WITH US.

Our Outsourcing: How to Make it Work guide explores how you can utilize accounting and finance outsourcing to drive growth to your business and add value to your processes.

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