Long-Term Finance Vs Short-Term Finance | Credit Help India

Long-term Finance vs Short-term Finance

If a person runs a business, he/she will need finance, whether short-term or long-term. For running that business, we need to have a good amount of finance in hand. That is why it is said that finance is the lifeblood of business. There are various sources of finance. The finances have to be raised from the right kind of source at the right time.

Among the many sources of finance, short-term and long-term finance are sources too. In this article, we will only discuss the long-term and the short-term finances.

Long-term finance

For this, we need to know why one needs long-term finance in a business? Well, these long-term finances are required for the major expansion of the business. Businesses continue for many years. For making major decisions in the business one needs to have long-term finance in hand. The major needs that is made with the help of these finances are modernization and expansion. Long-term finances also help in huge quantity requirements. These finances help us in meeting the asset-liability mismatch. If we are having an excess of assets or excess of liability, then both are dangerous for any business. So, the long-term finances take care of these things.

Pros and Cons of Long-term finance

The biggest advantage of long-term finance is that it offers great flexibility. It offers resources for funding many capital needs. It also reduces dependence on anyone capital source. A company can enjoy having a long-term relationship with the same investor. He can make a profit throughout the life of the financing.

The biggest disadvantage of long-term finance is that it restricts your monthly income. You tend to pay away your debt balances, which results in a deficiency in the cash flow of the company. Another disadvantage of long-term finance is that it tends to lead you to a lot of problems. An investor may reject your idea of business or deny investing in your business. This then becomes difficult to cover your monthly labor while making debt payments.

Short-term finance

When most people think of a small business, they think of the traditional 5- or 10-year term loan offered at the bank. As a general rule, borrowing should not increase the value of the business. It should also not ease an opportunity to capture extra ROI. A long-term loan is a good fit to finance long-term business needs. But there are many purposes where the longer terms of small business loans might not be the best fit. For small businesses, their local bank is no longer the only place to borrow money. The concept of short-term finance is introduced. There are several other agencies to borrow money for the short-term.

Pros and cons of Short-term finance

The biggest advantage of short-term finance is availability. It is very easy to get as the risk involved in delivering the loan varies on many factors. These finances in comparison with long-term finances are less risky. It is because creditors grant credit for a short period.

The biggest con of short-term financing is that the big firms worry more often. It is because they produce slow-moving inventories. They also create a tight position for a firm more often.


Q1. Are credit scores counted in short-term finance?

Ans- The short-term financers give importance to the credit score most of the time. Increased score in credit gives a lot of advantages to the businessman.

Q2. What are the sources of long-term finance?

Ans- The sources of long-term finance are shares, preference shares, and equity shares. Debentures and public deposits are also some of the many sources.

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