Fin/200 Long-Term and Short-Term Financing

Long-term financing is financing furnished to, used by and is to be reconciled of an excessive term, generally a term exceeding the span of one year. In dissimilarity, short-term financing is funding that is commonly repayable within the duration of one year or less. Although, the period of repayment of short-term financing may come with a three years proviso.

Long-term financing in connection with organizations may be consumed (used or exhausted) for a multitude of conditions like organizational expansion, equipment or inventory procurement, or obtaining other fixed assets. Occasionally, organizations riskily opt to use short-term financing in these approaches — anticipating that the cash inflow will be substantial enough to repay the funding in the short-term. For example, in lieu of long-term financing, an organization that anticipates a swift return from the funded investment like equipment or inventory (from the raw material to the sale of finished goods), may opt to use short-term financing. The interest rate connected to short-term financing is usually high and fixed-rate.

The financing an organization may secure or "is made available to" may vary, owing to the nature or pursuits of the organization’s business model or structure. Sources for long-term financing include equity, debt, and derivatives. In addition, unlike long-term financing, most short-term loan transactions are “unsecured” and thus do not require a form of collateral indemnity. In closing, although short-term loans are appropriate for all business sizes, because creditors hold that short-term loans are less risky than long-term loans, a number of institutions will grant only short-term loans to newer businesses.