Difference between long-term & short term sources of finance

Written by jim franklin
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Difference between long-term & short term sources of finance
Sources of finance are available in long and short terms. (finance image by Christopher Hall from Fotolia.com)

Sources of finance can be classifies as long term or short term. The classification usually relates to duration, or how long it takes before the money is received or must be repaid. Businesses and individuals use long- and short-term sources of financing to raise capital for improvements and meet financial obligations.

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Duration

Most short-term sources of financing occur over a period of one year, although some sources can last up to three years or longer. Long-term financing like home mortgages are typically available in 15- and 30-year durations.

Interest

Because short-term financing is repaid over a shorter length of time, the interest rate or cost to borrow money is smaller. Long-term sources such as bank loans have a higher interest rate due to the amount of time it takes to finance the loan and repay the capital.

Types

Short- and long-term sources of financing vary in instrument type. Examples of short-term sources include accounts payable, leases, short-term commercial loans, customer cash advances, bank overdraft coverages and accounts receivable lending or factoring. Examples of long-term sources of finance include company shares or stocks, bonds, long-term commercial loans, retained earnings, operating and finance leases and venture capitalists.

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