Long Term and Short Term Finances
1/13/2014
FIN200

The difference between long-term and short-term financing in the length of time the debt obligation remains outstanding. Short-term financing is typically for continuing operations and less than a year. Short-term is more often used for working capital requirements, or day-to-day operations of the business. There are 4 main types of short-term debt financing:
Overdraft is the instant extension of credit from a lending institution. When a company or even a consumer has an overdraft arrangement with their bank, it can draw down or transmit cash from their account beyond the available balance. Letter of credit is a letter from a bank guaranteeing a buyer’s payment to a seller, stating that a seller will receive the amount within the credit period. Short-Term Loan is as it states, a loan that must be repaid within a year or less with interest. Bill of exchange is a document that binds one party to pay a fixed sum of money to another party at a specified future date. Short-term debt financing provides the business with liquidity to conduct its day-to-day operations and to maintain working capital needs, Short-term is easier to negotiate and is less taxing on the company. However, they do present some disadvantages to the business as well, short-term has to be monitored closely to avoid bad relationships with suppliers and bankers, or a bad reputation in the industry for not paying debts on time. Also, they only meet working capital or immediate business needs. They are not useful for servicing any long term plans with larger capital requirements, higher risk, and longer