Difference between Short term and Long term financing | Corporate Finance

Difference between Short term and Long term financing
Corporate Finance
Management Notes

Short-term financing refers to business or personal loans that have a shorter-than-average time span for repaying the loan, typically one year or less. Long-term financing refers to business or personal loans that have Longer time span for repaying the loan, more than a year.

S.No. Short Term Financing Long term Financing
1. Short-term financing refers to business or personal loans that have a shorter-than-average time span for repaying the loan, typically one year or less. Long-term financing refers to business or personal loans that have Longer time span for repaying the loan, more than a year.
2. Fund raised from short term financing is generally less costly than long term financing because:

a) Flotation costs are lower.

b) does not include maturity risk premium.etc.

Fund raised from long term financing is more costly than short term financing because:

a) Flotation costs are higher.

b) includes maturity risk premium.etc.

3. Short term financing is more flexible than long term financing because amount of fund raised using sources of short term financing can be changed as per requirement. Long term financing is less flexible than short term financing because amount of fund raised using sources of long term financing cannot be changed as per requirement.Although with a repayment provision , long term debt can be repaid earlier,prepayment penalties may be charged.
4. Short term loan agreements are less restrictive than long term loan agreement. Long term loan agreements contain restrictive provisions or covenants which constrain the firm’s future actions/activities.
5. Short term loans may not require collateral or security. Long term loans require specific assets as collateral or security.
6. Short term financing is more riskier than long term financing because 

a) interest rate on short term loan is relatively not stable.

b) temporary recession may render to no payment of debt and may lead to bankruptcy.

Long  term financing is less riskier than long term financing because 

a) interest rate on long term loan is relatively stable.

b) temporary recession do not affect it much.

7. Fund raised from short term financing should not be used to acquire fixed assets like land and building,plant , machinery,furniture,vehicles,etc. rather it should be used to increase level of current assets and working capital. Fund raised from long term sources can be used to finance any type of assets like fixed assets or current assets.
8. Companies can only raise limited amount of funds by the help of short term financing.  Companies can raise large amount of fund by the help of long term financing.

 

Post Your Comment Here

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.