Among the very first challenges you’ll have to sort out as a newly minted entrepreneur is the issue of funding your business operations. It’s a viable option for you to take out a loan, as doing so may balance out your monthly cash flow, expand your product line at a timely moment, and keep you from dipping into any personal funds you might be tempted to inject into the business.
Many providers of business loans Philippines-based entrepreneurs trust, such as Maya Business, offer options that will appropriately match your company’s specific needs. To make the best of the money you’ve borrowed, however, you’ll need to consider a number of factors—one of which is whether you should go for a short-term or long-term loan.
This guide will help you go through the motions of choosing a loan program that contributes to your business’s short-term and long-term financial health.
What is the Purpose of the Loan?
First, clearly define why you need the loan. Are you looking for quick capital to purchase inventory, cover immediate expenses, or make your business’s cash flow more manageable? If so, a short-term loan might be the best fit. Short-term loans are designed for immediate, smaller needs and are typically repaid within a year. A short term also means you won’t be burdened with the issue of repayment for longer than you need to be.
On the other hand, if your goal is to invest in your long-term growth by purchasing new equipment, expanding your business premises, or acquiring other substantial investments, a long-term loan would be more appropriate. These loans are repaid over several years, allowing you to spread out the cost of significant investments and pay off your loan with future revenues.
What is the Loan Amount Needed?
Next, determine the exact amount of money your business requires. For smaller, short-term needs like stocking up on supplies or minor renovations, it’s better to go for a short-term loan. These loans are generally easier to obtain and come in smaller amounts. Meanwhile, long-term loans provide larger sums of money, which are repaid over an extended period—again, making them practical options for significant investments that take time to generate returns.
It’s also possible to enjoy the best of both worlds by getting a flexible loan. The Philippines’ Maya Flexi Loan, for instance, allows you to unlock a loan of up to PHP 2 million and divide it into separate loans for different business needs.
What is the Repayment Period?
How quickly can you repay the loan without straining your finances? Short-term loans typically have higher monthly payments but can be cleared quickly, which is beneficial if you expect rapid returns on your investment. Conversely, if you prefer lower monthly payments that won't significantly disrupt your cash flow, a long-term loan is the better choice. These loans have extended repayment periods, which reduces the immediate financial burden but also increases the total interest you’ll have to pay over time.
What is the Interest Rate and Total Cost of the Loan?
When examining your options, make sure to account for the interest rates offered for both short-term and long-term loans. Short-term loans often come with higher interest rates, but a lower overall cost because they can be repaid quickly. In contrast, long-term loans generally offer lower interest rates, but result in a higher total cost due to the extended repayment period.
It’s always a smart idea, then, to calculate the total cost—including interest—to determine which loan option is the more cost-effective one for your business.
What is My Current Cash Flow Situation?
Your current cash flow also plays a key role in determining what kind of loan you can manage. If your business has a stable, strong cash flow, you might be able to handle the higher monthly payments of a short-term loan comfortably. But if your cash flow is less predictable, a long-term loan with lower monthly payments can help you avoid financial strain in the early months of doing business, when you’re typically striving to be as frugal as possible. Such an approach ensures that you can meet your loan obligations even during slower business periods.
How Will the Loan Impact My Business Credit?
If managed well, a short-term loan can have a lesser impact on your long-term credit. It can thus be an effective instrument for showing lenders and potential investors that you can repay your debts quickly and responsibly. Long-term loans, on the other hand, can demonstrate a stable credit history for you, provided you’re consistent about your repayments. This can be especially beneficial if you plan to seek additional funding from high-profile lenders or investors in the future.
What Is the State of My Business Plan?
Regardless of which loan type you choose, you’ll also want to think about how it will appear in your business plan. For short-term loans, you’ll want to add the details about them in a plan that emphasizes immediate returns and a clear repayment strategy. If you’ve signed up for any long-term loans, your business plan should eventually highlight sustained growth and profitability over the loan period. Your loan’s role in your business plan should assure lenders of your company’s viability and your ability to repay the loan over time.
What are the Risks Involved?
Next, evaluate the risks associated with each type of loan. Market changes, cash flow disruptions, or unexpected expenses can all impact your ability to repay either type. Short-term loans carry the risk of higher monthly payments, which can be challenging during lean periods. Long-term loans, on the other hand, reduce your monthly payment pressure, but will increase the duration of your financial commitment—something you may be reasonably anxious about if you don’t know what your business prospects are like in the next few years.
Do I Have a Contingency Plan?
Finally, develop a contingency plan for repaying your loan in case things don’t go as expected. If you’re leaning towards getting a short-term loan, ensure you have a backup strategy for quick repayment, such as an emergency fund or a secondary revenue stream. For long-term loans, explore business strategies that will give you good chances of growing and sustaining your financial health. Either way, don’t apply for a loan until you have a plan to tap into reserves for any unexpected expenses.
The rationale here is that thoughtful planning and the right choices about how, when, and who to borrow money from will all contribute positively to your entrepreneurial goals. Weigh the options that are available to your business, and use the criteria listed above for your final decision.
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