Short Term and Long Term Financing

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Short Term Finance

What is Short Term Financing?

Short term financing is basically refers to additional money for a business which requires for running its business for short terms which is usually a period of one year. There are some sources of short term finance which are as following:-

Overdraft

Overdraft bank basically means a facility that the bank provides to its customers where the customer is given permission to draw money from the banks in surplus of their balance in their heir bank accounts. When taking overdraft from the bank, the account must be zero to get extras extension of money and the interest rate will be very high and we have to pay back the bank in a very short period of time.

Trade Credit

Trade credit refers to buying products and servicers of a business which needs in the course of its business on credit, depending on the trade practices prevalent in a particular industry, the nature of the business relationship between the supplier and the company may give a different time period to pay the products and services they buy from different suppliers. Exactly as companies get their credit from their suppliers, they must also give credit to their customers. The customers are given 50 to 60 days to pay up the bills. After 60 days, interest will be applied on the customers. If the customers are unable to pay, the will be asked for installment plan.

Bank Loans

Bank Loan means loans which are given to banks which need to repaid their installment over a fixed period of time which may be short or long term period. Even though it is called bank loans, these loans can be move forward by banks or other financial institution. Usually loans like this are generally given for a certain reason such as purchases of capital equipment.

Advantages/ Disadvantages of Short Term Finance

Short term financing is a method to raise funds which involves financial responsibility that is needed to be repaid within a year or less. Short term financing is flexible and a fast way for companies to obtain working capital for their daily operations. The main disadvantage is that a company may be too dependent on short term funds and threatened to high banking fees and interest rate. This will may affect the profit margins.

Speed

Short-term loans can be achieved much fast and easier compared to long-term financing. Lenders will not make through an examination of the company’s account for short-term lending compared to the case they do for long-term loans. Medium size companies do not have large amount of cash and are vulnerable to sudden financial shocks such as non-payment by a key debtor.

Flexibility

Small companies usually have seasonal variations in the cash and need access to capital over that period. Overdraft protection is one of the form of short term finance where the bank agrees to pay the company’s cash withdrawals, checks, and electronic debits to a certain limit. The lender will charge a fee for this facility on any balance outstanding. The cost of short term finance may be lesser compared to the long term finance where the cost may be higher. Drawback to this type of short-term finance flexibility is that the bank can withdraw the overdraft protection in a short notice.

Risk

Market circumstances, such as retreat, may cost the small businesses into borrowing a large amount on a short term basis. Short term finance can be a risk factor for the borrower A short term loan can be renewed by the lender on a certain terms than the original contract. This does not only cause the businesses to face a high cost of capital, it may not be able to service the amount of debt collected. This will put the company in a weak position where it could cause the company to be bankrupt.

Management

Lenders who extend their short term financing does not involve themselves in the business decisions about capital investment. Long-term finance is associate by the number of provisions, such as...
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