Getting loans through different financing options is an ideal strategy for obtaining that much-needed business capital. By increasing your cashflow 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 have to understand the difference between short-term financing and long-term financing.
Short-term loans vs. long-term loans
In a nutshell, we may explain the difference between the two by citing the length of time the obligation to pay the debt is presented. For short-term loans, the duration is usually less than one year. For long-term loans, the length of time that the debtor is obliged to pay the loan can typically run for more than a year. Initially, you might think that the duration and frequency of debt payment are the only things to consider. But if you would 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.
Loans and your books
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 way for an accurate calculation of your business net worth. These financial data shall also be reflected in your financial statements. Therefore, your books will always be affected by your loans.
Loans and 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 cashflow. 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 that these kinds of debt are not included in the analysis of your cashflow on a monthly basis. 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.
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.
Discover more about the ideal strategies for keeping your business finances on solid ground. Contact us at D&V Philippines today!