Long term and short term sources of finance

• In addition to being classified as external and internal
• Sources of finance can also be grouped according to whether they are short term or long term in nature

Short term finance

• Refers to all those sources of finance that offered on terms of about 12 months or less
• They are usually used as a short gap measure in business to alleviate short term capital needs
• For example to temporarily fix a business’s working capital needs where there is a “gap” in the cash budget
• Short term sources of finance include:
• Bank overdrafts
• Bank loans although it is possible to arrange for long term loans
• Trade credit
• Use of credit cards
• Debt factoring
• Short term lease
• Extending creditors days
• Decreasing debtor’s payment days
• Reducing the amounts of inventories held by the business
• Once of or limited period donation, grants and subsidies

Long term finance

• Are offered on terms of more than twelve months
• Usually involve significantly larger amounts and are thus suited for such projects as building new plants and other capital budgeting activities
• Examples include:
• The issue of new share capital
• Finance leases
• Hire Purchase (most contracts are 24 months in length)
• Debentures
• Mortgage
• Sometimes donations,grants and subsidies can be recurring in which case they qualify as long term finance otherwise they are short term sources of finance

To access more topics go to the O Level Business Notes page.