Short and long-term financing: which one to choose?

On: March 2, 2022

Find out what the main characteristics of short-term and long-term financing are and which one to choose according to your type of company.

Financing is essential to achieve the operational goals of any company; be it large, medium, or small. It is even an important step if a personal project is going to be completed. For this reason, financial decisions must be the most accurate possible.

There are several types of financing. Among them, the short and long term. The function of both is to provide capital to make some investments and maintain or optimize the profitability of the company. However, their characteristics are different.

Choosing what type of financing is ideal for your organization depends, mainly, on the needs and objectives of the company. In addition, it is important to evaluate what type of financial entities you have access to.

Short-term financing

This type of financing is used to obtain immediate liquidity and solve operations directly related to income. This is carried out in a period not exceeding 12 months.

Generally, the companies that opt for this route estimate that they will receive an economic benefit greater than the financial cost of the credit.

Short-term financing is ideal for small and medium-sized businesses. In addition, it includes financial practices such as factoring (transfer of invoices receivable in exchange for cash), promissory note discounting, or confirming (payment service to suppliers).

Some types of short-term financing are trade credit, bank credit, line of credit, inventory-based financing, and promissory notes.

This type of investment has some advantages such as:

Your interest rates are not as high because the period is not long.
The procedure is not that complex and, in some cases, it is not necessary to give a guarantee.
They are quick and easy to access.

Long-term financing

Long-term financing is understood as that which extends for more than one year and, in most cases, requires collateral. Beyond dealing with problems or unexpected situations, this financing can help the company with new projects to boost its development.

To access long-term financing, it is necessary to meet some requirements, such as good credit history or presenting a sustainable project. For this reason, managers or those in charge of the finance area must carefully evaluate the undertakings they want to carry out, including an exhaustive risk analysis.

This type of financing includes car loan, issue of shares, bonds, and financial leasing; and its advantages are:

Improves credit / financial history in the future.
It allows the organization to take the step of restructuring the productivity model. Being a large investment, processes are optimized to improve results.

What is the best option for your organization?

To decide on this type, it is necessary to carry out an extensive evaluation of the processes, objectives, and needs of the company. It is also important to have a plan and stick to it. This, added to good management by the board, will guarantee the success of the new projects or the solution of the problems presented.