Comparing long and short term financing

Reference no: EM1352924

Write a paper comparing long and short term financing. Describe situations in which each type of financing would be used.
Long Term:

In business the requirement of loan is always there. You need to buy land, machinery, construction of the work shed. This type of expenditure requires long term finance. you can pay it over a long period out of the earnings of the business If the business is paying one should never lose the opportunity to expand it further. Naturally it will require funds to invest to buy better machinery, expand the area of work place to install it. You will need loan for all these. You will approach a bank to grant you this loan. You will work out the period over which the business will enable you to earn enough to repay it. Bank will examine your financial statement and suggest you the reasonable period for it without affecting your business. You both agree on the projections of the earning every year and based on that will decide the period.

Short Term:

You require short period of time to convert your current assets into cash. You manufacture some item or take job order from others and then supply them to your customers. Your customers will in turn require some time to sell your products. They will pay you when they are able to sell the entire item and pay you. For duration of this entire circle of converting the raw-materials into products-in-process to finished goods you will require funds to pay your daily business expenses. Normally the entire circle requires 180 days to complete. The loan you seek for this purpose is called short term or working capital

Reference no: EM1352924

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