SHORT AND LONG TERM FINANCE Flashcards
Short Term Finance
Refers to funding or capital that is acquired and used for a relatively brief period, typically up to one year.
Used to meet immediate or short-term financial needs, such as working capital requirements, seasonal fluctuations, or temporary cash flow gaps.
Common sources include bank overdrafts, trade credit, short-term loans, and lines of credit.
Characteristics: Short-term finance is typically associated with lower interest rates but may require more frequent repayments.
Long Term Finance
Involves acquiring and using capital for extended periods, typically exceeding one year, to support business growth, capital investments, or major projects.
Used for making significant investments in assets, expanding operations, funding research and development, or other long-term initiatives.
Common sources include equity financing, long-term loans, bonds, and retained earnings.
Long-term finance typically carries higher interest rates but offers longer repayment periods, often with fixed interest rates.
Factors Influencing the choice of a source of finance
- Purpose of funds
- Cost
- Status and size
- Amount Required
- Flexibility
- State of the external environment
- Gearing
Purpose or Use of Funds
Definition: The specific reason or objective for which the funds are required.
Influence: Different funding sources may be more suitable for particular purposes, such as equity financing for long-term investments and short-term loans for working capital.
Cost
Definition: The overall expense associated with acquiring and using the source of finance.
Influence: The choice of finance depends on cost factors, as some sources may have higher interest rates, fees, or equity dilution.
Status and Size of the Business
Definition: The legal structure and scale of the company, including its legal entity and size.
Influence: The business’s structure may determine eligibility for certain financing options, with larger corporations having more diverse choices than small businesses.
Amount Required
Definition: The total sum of funds needed for the intended purpose.
Influence: The magnitude of the financial need may limit or expand the choice of finance sources, as some may not be suitable for large amounts.
Flexibility
Definition: The adaptability and terms of the financing arrangement.
Influence: Flexibility is crucial, as businesses may require financing options that can adjust to changing financial conditions or business needs.
State of External Environment
Definition: The economic, regulatory, and market conditions at the time of funding.
Influence: The external environment can impact the availability and terms of financing, particularly in periods of economic uncertainty or industry-specific regulations.
Gearing
Definition: The proportion of debt in a company’s capital structure relative to equity.
Gearing is about how much of your own money you use compared to borrowed money in your business. It can affect how safe or risky your business is.
Influence: Gearing, or the debt-to-equity ratio, can affect the risk perception of potential investors or lenders and influence their willingness to provide financing.
