Long Term and Short Term Financing

In order for a company to operate successfully, it is necessary to borrow funds from institutions to make ends meet. This could be that it is a start-up company, or periods of income arise during seasonal operation, but business continues to commence throughout the year. Large well established corporations utilize both long and short-term financing on a daily basis.

Both long-term and short-term financing is utilized to supplement cash flow during slow times of business. While long term financing has a higher rate, the time frame for repayment is spread over a number of years, thus the name long-term financing. In retrospect, short-term financing has a somewhat lower interest rate for repayment. Although, these terms aren’t always consistent, during times of economic strain, the rates of interest repayment may flip. When this occurs and generally depending on where the current rate is, insight into future movement of these rates is known.

A business using investor or institutional financing will utilize both methods to further their dollar, and the amount of liquidity, maximizing profit, determined on market stability.

An example of a business’s utilizing these forms of financing are as follows. A growing (economicly speaking) Christmas tree farm generates revenue during the winter months. November – December. Showing profit from a first year, more land is purchased, and saplings for future yields. To supplement income over the next 10 years, the Christmas tree farm takes long-term financing to supplement income while future profits are made.

Providing an example of short-term financing is a Mortgage company borrowing funds from a bank in the form of a line of credit to purchase a new copy machine. At $1000, and being a small business, the mortgage company makes monthly payments of $50, for 11 months, repaying the amount borrowed, plus interest.