The difference between short and long term financing

Maintaining healthy cash flow can be challenging; between ongoing expenses and bills, poor cash flow can severely impact your customers, staff and bottom line. Business owners need to understand the differences between short and long-term financing when developing a 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 the 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.

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.

Short-term financing:

Short term financing, or working capital financing, looks 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.