Long and Short Term Finance

Financing for a firm’s daily operations can be in the form of long-term debt or short-term debt. Long-term financing is an amount owed for a period that exceeds one year from the date on the Balance Sheet. Funded debt is a measure of the firm’s leverage, which is typically in the form of bonds and notes. Bonds and notes are fixed income securities that are borrowed from an investor for a specified period of time at a fixed interest rate, which typically mature in 10 years. A note is a debt security maturing within 10 years, although Government bonds carry a 30-year maturity. Corporate bonds and municipal bonds mature between 3 and 10 years (Investopedia, 2009).
Short-term funds are secured through bank loans, corporate promissory notes, foreign borrowing and credit extended from suppliers. Lines of Credit enable companies to borrow and repay loans as necessary, but often have restrictions attached to the agreement. Trade credit is generally extended for only a few months, yet many firms push the limit of their repayment unless a cash discount is offered to encourage a quicker repayment. Some institutions offer cash discounts, which reduce the amount of repayment if the payment is made before the due date of the loan, but some firms choose to forgo the offered discount to utilize the loaned money for a longer period (Block, Hirt and Danielsen, 2009, p. 225). This decision to forgo the cash discount could keep a firm from having to take another loan within that time period.
Long-term loans would be appropriate for financing plant and equipment that would not provide a satisfactory return for many years. Short-term loans would be appropriate for purchasing raw materials and paying monthly bills, such as electricity and water/sewer, until a satisfactory amount of monthly revenue is maintained.

Investopedia. (2009). Long term Debt. Retrieved April 22, 2009, from Investopedia: http://www.investopedia.com/terms/l/longtermdebt.asp
Block, Hirt and...