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Financing: Long Term and Short Term - Essay Example

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Financing: Long Term and Short Term

There are two major categories of financing that normally exist in most businesses (Jim, 2011). These categories are short term and long term financing methods. These categories basically differ in the period for which they are provided to the business. For instance, short term financing is a type of financing that is provided for a short period of time, usually not exceeding one year, to the business. On the other hand, long term financing is any type of finance source for a business that is provided for a long period of time, usually exceeding one year, to the business. This paper aims at discussing the two categories of financing, their applications, examples, current trends and real experiences with the two categories of financing. Short-term Financing This is the type of financing for a business that is normally required for a short period of time, usually less than one year (Pagirl, 2009). It is normally required by the business in order to provide the working capital for the business. The working capital is the capital that is used by the business to purchase raw materials required by the business on a daily basis, payment of salaries and wages, and to meet the day to day expenses of the business (KreditnaBanka, 2012). For example, a company like Nestle may require performing a number of activities in the coming months. They may decide to promote their new product in the market. To do this, the company may decide to contract sales and marketing personnel just for the promotional period, it may need to organize a road show, media advertisement and other events. The company however will need finance to carry out these activities. The kind of finance that the company needs is referred to as short term financing. This is because the finance is needed for a short period of time just to meet certain obligations of the business. From the example, therefore, short term financing may also be required in order to meet seasonal finance requirements of a business. This finance is normally available at lower rates of interest. This short term financing for a business, however, must come from some source. Some sources of short term finance include; trade credit, advances from customers, financial institutions and commercial banks among others. Application of Short term financing Firms may need short term financing in order to fill the balance left by the insufficient cash flows of the business to meet the short term financial needs of the business (Gregory, 2004). Therefore, short term financing is applied when the cash flows of the business are not sufficient to meet the financial demands of the business in a short period. Some firms may need to acquire inventory now or meet other short term asset needs now rather than wait for so long for the business to make enough money, in this case, short term finance is necessary and applied. Types/examples/sources of short term financing a) Short term loans These are loans given by commercial banks or financial institutions to businesses in order to meet their short term financial obligations. These loans are given for a period of less than one year. These loans include promissory notes and a line of credit. b) Trade credits These are short term finances given to businesses by their suppliers. It is a form of act of businesses delaying their payments to the suppliers for a period of 30 days. This method may have a cost in the form of some interest that is ...Show more

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Title: Financing: Long-term and Short-term Heather Jenks Corporate Managerial Finance BUS 657 Instructor: John Brock Introduction Any form of investment or business need to acquire finance that they will use in one way or the other in order to get established…
Author : gerlachadah
Financing: Long Term and Short Term essay example
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