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Short-Term, Medium-Term and Long-TermFinancing Options

The basic difference among these financing schemes is the repayment term ormaturity period. In the Philippines, customarily:

Short-term financing schemeshave repayments periods of less than oneyear.

These deal with short-term credit which may either be secured or

unsecured.

Secured credit are those which require a collateral backing, while

unsecured credit or clean credit are those which have no collateral

requirements.

Medium-term financing schemes are those with a maturity period of

more than one-year but less than 5 years.

Long-term financing schemes are those with maturity periods of 5 years

and more.

Medium term and long term financing are also customarily referred to as term

financing. Various credit instruments can fall under these categories. For instance, thereare short term loans, medium-term loans and long-term loans. Bonds, lease financing,

and other securities are usually designed to be medium-term and long-term financing

instruments.

Below is a comparison between short-term financing and term financing.

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Table I

COMPARISON BETWEEN SHORT TERM AND TERM FINANCING

TYPE ADVANTAGES DISADVANTAGES

CREDIT

LINE

ideal for back-up reserve/ reserve

for opening costs

interest is not paid unless funds

are used

short-term

much documentation

SHORT-

TERM

FINANCING

easier to obtain since less risky

from the point of view of the

creditor when appraising LGU

often less costly since cost of

short-term borrowing are lower

than costs of long-term debt when

rolled-over

LGUs will not be saddled withinterest payments on debts over

periods of time when funds are

not needed

offers flexibility to borrower.

Once, settled the borrower may

elect other sources of credit

good source for seasonal and

temporary fund requirements

matures more frequently,

which may put an LGU in a

tight financial position to

cover debt payments as

scheduled

uncertainty in interest costs

of refinancing

refinancing may be difficultto obtain if payment record

of LGU for the previous loan

is unsatisfactory

MEDIUM-

AND LONG-

TERM

all things being equal, less risky

for LGUs since the chances of

defaulting on principal and

interest payment are reduced

the LGU borrower is struck

with the terms of the long-

term loan for a longer period.

higher, cost of financing,more expensive for the LGU

pay interest on debt over

periods of time when the

funds are not needed

Factors to Consider inWeighing Short-TermOver Term-Financing

In selecting which type of financing term an LGU will not opt for, there areseveral considerations that have to be made.

Nature of financing need.Normally, an LGU would incur short-term debt to

finance short-term or seasonal variations in current assets. It will use long-

term debts to finance the acquisition of fixed assets.

Twenty percent (20%) debt servicing limitprovided under the Code

Trade off between risk and profitabilitywhich is determined by: