When it comes to financing solutions, there are numerous avenues from which companies and corporations can draw funds from. The two main types of financing solutions are short term financing and long term financing. Each of these has unique features, and specific requirements that companies need to be aware of when they are looking for funding. There are several major ways in which short term finance and long term finance; uses, fees and other miscellaneous features, length of time on repayment, and variations in financing methods.
Short term financing is one of the most common ways for corporations and businesses to receive funding since it is a smaller amount of money, generally, that can be used on a wide variety of needs. A lot of companies use temporary financing solutions to replenish stock when the demand is high, that way they can capitalize on the current demand rather than wait for their revenue to build up so they can purchase the inventory at a later date. Long term financing can be used to pay off a substantial amount of debt, expand the company, increase facilities, or do large construction projects.
When it comes to fees and interest on the borrowed money, you will find that with short term financing solutions, the fees are significantly less than with the long term solutions. This is because companies tack on a lot of interest due to the extensive length of time on long term financing. In short term financing, commercial paper is one of the solutions that incurs the least amount of fees and interest, but unfortunately this is only for corporations with excellent credit.
The repayment time on these two types of financing solutions vary drastically. With short term financing, the money is generally due within one year, however it can be sooner than that depending on the terms of the agreement. Long term financing, however, can be repaid in as many as thirty years, but this repayment time frame depends on the contract made with the people you are borrowing the funds from.
With each type of finance type, there are multiple methods that the funds are dispersed. There are three main types of short term financing methods; short-term loans, trade credit, and commercial paper. Short-term finance loans are a simple line of credit given by the bank or other financing company while trade credit is basically a deferment of payment. Commercial paper is a type of financing granted to corporations with outstanding credit only. In long term financing there are four main types of sources; shares, debentures, public deposits, and retained earnings.
When it comes to long term financing and short term financing there are numerous differences. It is incredibly important for a corporation or business to evaluate each carefully and also look at the various options of funding that are available to them. Choosing the wrong type of funding can be extremely detrimental to the company and lead to further financial distress.
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