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

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

Short-term financing schemes have repayments periods of less than one
year.
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, there
are 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 with
interest 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 difficult
to 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 in Weighing Short-Term Over Term-Financing

In selecting which type of financing term an LGU will not opt for, there are
several 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 limit provided under the Code
Trade off between risk and profitability which is determined by: