Long- and short-term sources help businesses meet their financial needs. The long-term source of finance is used for big investments in acquiring land, machinery, or business expansion. In contrast, short-term sources help cover the daily expenses of purchasing raw materials, paying salaries, or utility bills. This means that understanding long-term and short-term sources of finance helps a business choose the right funding option based on their needs, repayment ability, and financial goals.
What is Long Term Sources of Finance?
Long-term funds raised are funds acquired above five years for financing major investments such as infrastructure, expansion, or research and development. Long-term finance is used by businesses to increase stability and growth.
Sources of finance having a period of more than 5 years for repayment. Some of them have a period of 20-30 years. These funds are commonly used by organizations for expansion, infrastructure development, and acquisition of fixed assets. High capital investment is involved in this source as the amount for funding is also considerable. Companies have to pay in the long term because of the extended period for repayment.
What is Short Term Sources of Finance?
Short-term sources of finance include those funds borrowed for a period of less than one year to meet day-to-day expenses such as purchasing inventory, paying employees, or making rent. Businesses often seek short-term finance to manage their working capital.
Short-term sources of finance refer to a form of finance where the repayment period is less than 12 months. It mainly deals with operational expenses and other short-term financial needs. Compared to long-term finance, borrowing amounts are normally lower for this type of financing. It also becomes available rapidly, hence it is easily sourced by businesses in case of immediate needs.
Difference Between Long Term and Short Term Sources of Finance
The difference between the long-term and short term sources of finance includes the period, objective, and method of repaying funds along with funding sources. Long-term and short-term sources of finance play an essential role in a business. It provides for growth through long-term sources and day-to-day costs through short-term finance.
Duration
Long-term finance sources last more than five years and sometimes even up to 20-30 years. These funds are utilized by businesses when large investments are required for future growth. Funds remain in the company for a long period, thus allowing businesses to make stable financial plans and investments.
Short-term sources of finance last less than a year. Organizations apply these funds in case of emergency financial requirements or day-to-day operations. Short-term funds need to be paid back fast; hence, businesses should carefully design the short-term finance to prevent cash flow issues and ensure normal business running.
Purpose
With long-term finance, businesses expand their operations, develop structures, and acquire fixed assets, including land, machinery, and buildings. All this aids in business expansion through increased production capacity and efficiency. Long-term funds support major projects that tend to benefit a company in the long run.
It provides immediate short-term funds that will pay off working capital and the short-term needs of running the business’s day-to-day activities. Companies utilize the money for salary, rental payments, electricity, water, and even purchases of stock inventories. In turn, finance covers immediate needs and provides for the uninterrupted daily running of a business.
Repayment Period
Long-term finance is a long-term repayment period that takes about 20-30 years. The businesses repay these funds in instalments over time, which reduces financial pressure. Since long-term finance is used for major investments, companies carefully plan repayments to manage smooth cash flow.
The repayment period of short-term finance is short, spanning a year. Businesses must return the funds to lenders quickly, usually in months. Options such as short-term loans and credit help companies meet their urgent financial needs, but proper financial discipline is required so that businesses do not face issues at the time of repayment.
Sources
Major long-term sources of finance are equity capital, debentures, and bank loans. Businesses issue shares, debentures, or borrow money from banks for financing. Large amounts of funds from such sources enable business houses to invest for long-term prosperity.
Short-term finance originates from trade credit, bank overdraft, and bill discounting. Firms get short-term credit from suppliers or banks borrowing or selling their invoices for cash on tight schedules. This type of finance helps the business fulfil the short-term immediate demands by not waiting for the long loan approval procedures.
Risk
Long-term finance bears a lot of risks since significant amounts of finances are involved. Companies have to pay vast amounts over several years, making it hard if the profitability goes down. In case of failure to clear long-term loans, the business may be affected by legal action or financial cases.
Lower risk is involved in short-term finance since businesses borrow relatively small amounts for a short period. Since the repayment happens quickly, the financial impact is relatively low. However, the businesses must manage their cash flow well to ensure they can repay short-term debts in time and avoid financial problems.
| Aspect | Long-Term Sources of Finance | Short-Term Sources of Finance |
| Duration | More than 5 years. | Less than 1 year. |
| Purpose | Used for business expansion, infrastructure, and fixed assets. | Used for working capital and daily expenses. |
| Repayment Period | Long repayment period, sometimes 20-30 years. | A short repayment period is usually within a year. |
| Sources | Equity capital, debentures, bank loans. | Trade credit, bank overdraft, bill discounting. |
| Risk | High risk due to large financial commitment. | Lower risk as it involves smaller amounts. |
Long Term vs Short Term Finance FAQs
What are long term and short term sources of finance?
Long-term and short-term sources of finance refer to the funds generated for long-term investment, more than 5 years, and for short-term requirements, less than 1 year.
What is the difference between long term and short term sources of finance?
Long-term sources of finance finance major business investments; whereas short-term sources help in managing the day-to-day transactions and working capital.
What are the examples of Long-term sources of finance?
These comprise equity capital, bank loans, debentures, and retained earnings.
What are the examples of short term sources of finance?
These comprise trade credit, bank overdraft, bill discounting, and commercial papers.
Why are both long term as well as short term sources of finance important?
They help business to maintain stability in finances for expansion and operations.
