Finance

Difference between Short term and Long term financing | Corporate Finance

Smirti

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 FinancingLong 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 this 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 this financing is more costly than short term financing because:

  • a) Flotation costs are higher.
  • b) includes maturity risk premium.etc.
3.It is more flexible than other financing because amount of fund raised using sources of this financing can be changed as per requirement.It is less flexible than other financing because amount of fund raised using sources of this 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.It is more riskier than other 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.
It  is less riskier than other financing because 

  • a) interest rate on long term loan is relatively stable.
  • b) temporary recession do not affect it much.
7.Fund raised from this 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 this financing. Companies can raise large amount of fund by the help of this financing.

Other Posts:

Types of Lease , Lease Financing

Motives of Holding Cash

You may also like:

One thought on “Difference between Short term and Long term financing | Corporate Finance”

Leave a Reply

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.