Short-Term Vs Long-Term Financing

Between ongoing expenses and bills, managing a healthy cash flow can be challenging, but understanding the differences between short and long-term financing can help refine an effective cash flow strategy.

There are various sources of financing available, with each being useful for different situations. Choosing the right source and mix is key for good cash flow, with financing options often being classified into two categories based on time period: short-term and long-term. To find the right plan for you, determine your needs and then match a financing option to meet those needs.

Short-term financing

Short term financing, or working capital financing, look at needs that arise in relation to financing current assets – for a period of less than one year. Working capital is the funds that are used in the day-to-day trading operations of a business. Short-term financing can help you to pay suppliers, increase inventory and cover expenses when you do not have sufficient cash on hand. Depending on your business’ requirements you might consider using one of the following options:
• Overdraft – extends your cash resources and protects your business’ credit rating.
• Line of credit – funding when you need it that is then paid back when you have surplus cash, offering flexibility, value and control.
• Business credit card – a convenient, fast payment method.

Long-term financing

Long-term financing options can help you invest in overall improvements to your business, for a period of more than 5 years. Capital expenditures, such as upgrading equipment, buying additional vehicles and renovating are funded using long-term sources of finance. Businesses can consider using the following options;
• Leasing – structuring a lease to match the useful life of the asset. This will help to preserve your cash and working capital for other uses.
• Term loans – from financial institutions, government and commercial banks. These allow you to accurately forecast your monthly cash flow through regular payments.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

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