Distinguish between short-term and long-term finance sources.?

Expert Solution

Short Term Financing :

If you are a small business owner, you have a choice between several kinds of financing, and each one of those has a typical term length (i.e. short-term or long-term) associated with it. Short term financing (working capital financing) relates to the financial needs that arise to finance current assets – for a period of less than one year. It is used in the business’ day-to-day dealing operations. It can help you to pay suppliers, increase inventory and cover charges when you do not have adequate cash on hand. This option is for a smaller amount of funding decision, and you pay the money back more quickly at a higher interest rate, with a shorter approval process.

Several examples of short-term financing:

• Working capital loans
• Spinning loans
• Short-term loans
• Merchant cash credits
• Small ticket equipment leasing

Long Term Financing : Long-term financing options can help you finance in overall improvements to your business, for a duration of more than 5 years. Capital investments, such as upgrading facilities, buying additional carriers and restoring are financed using long-term sources of finance or long-term loans. Funds raised from long-term financing is more costly because the volatile costs are higher. It also contains definitive provisions which constrain the firm’s scheduled activities.

Several examples of long-term financing:

• Big tool equipment loan
• Commercial property loan
• Long-term loans for bad credit

jeff jeffy answered 2 years ago

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