Difference between Long Term and Short Term Financing

Firms and individuals all require money to start and expand their business, or to meet personal goals and requirements. When it comes to choosing financing options, one is faced with long-term and short-term financing. While both provide the required money, differences exist in how the money is received and eventually paid back.

As the name implies, short term financing is usually for a shorter duration, which usually ranges from 12 months to 3 years. As for long term financing, the duration of the loan period can be up to 30 years.  For this reason, short term financing has a lower cost attached to it when the time of payment comes. For the borrower, the cost or interest rate is usually small due to the time frame.

Long term loans will have a relatively higher overall cost due to the extended duration. However, greater flexibility is a benefit from the borrower’s point of view, as he or she can choose various options to return the money back. This can take the form of flexible or adjustable interest rates, with the option of paying the money back at an earlier date. For short-term financing, the borrower will need to fulfil the obligations as per the agreement with few alternatives.

Furthermore, short term finances are somewhat easier to obtain due to the little hassle involved. The borrower may or may not have a sound credit history for obtaining a loan. Nonetheless, he or she must offer some collateral against the loan being acquired. Long term finances are usually undertaken by larger firms and corporations as they have the financial power and the credit history to guarantee the lender that all payments will be made on time.

There is also a difference in the terms applied to short and long term finances. The former can come in the form of accounts payable, lease, cash advances, accounting receivables etc, while the latter sources will include company shares, bonds, long terms loans and leases, along with venture capitalist.