Short Term vs Long Term Investments

Short Term versus Long Term Financing

Chase Ripley

FIN300: Financial Management

Strayer University

Professor Umair Warsi

February 5, 2012

When a company is looking for funding, there are two main financial solutions; short term financing and long term financing. Each of which have their key advantages for a specific business but also like anything else they have some glaring disadvantages. While they are both a form of financial solutions that is where the similarities end, they both have their own very unique features. Along with that they also have some very specific requirements that must be adhered to when companies are searching for financing. “There are several major ways in which short term finance and long term finance; uses, fees and other miscellaneous features, length of time on repayment, and variations in financing methods.”(shortterm.org, 2011) For a company to choose one over the other is based on the needs at that time. For example, short-term financing may be used to provide additional working capital, finance current assets, such as receivables and inventory, or provide interim financing for a long-term project, such as the acquisition of plant and equipment until long-term financing is arranged. Long-term financing may not always be appropriate because of perceived long-term credit risk or excessively high cost. Most of the time, short term financing is less expensive and easier to arrange and has more flexibility. The drawbacks of short-term financing are that it is subject to greater fluctuations in interest rates, refinancing is frequently required, there is greater risk of default because the loan comes due sooner, and any delinquency may damage the company`s credit rating.

When thinking of short term financing there are three known types of temporary finance solutions that can be utilized. Those three types are trade credits, short term loans and commercial paper. The first two can be used by any company without any type of credit...