⏱️ Short-Term Finance
Definition: Short-term finance is money borrowed or raised for a period of less than one year, typically to cover day-to-day needs.
Common short-term sources
- Bank overdraft — spend beyond your bank balance up to a limit
- Trade credit — buy now, pay suppliers later (30–90 days)
- Short-term loan — small loan repaid within months
- Factoring — selling unpaid invoices to a third party for immediate cash
Short-term finance is like a plaster — it solves an immediate problem but isn't a long-term solution 🩹
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🏗️ Long-Term Finance
Definition: Long-term finance is money raised for a period of more than one year, typically used to fund major investments and growth.
Common long-term sources
- Bank loan — fixed amount repaid over several years with interest
- Mortgage — long-term loan secured against property
- Share capital — selling shares to raise permanent capital
- Retained profit — reinvesting profits back into the business
- Venture capital — investment from specialist firms for high-growth businesses
- Leasing — using an asset without buying it outright
Long-term finance = long-term needs. You wouldn't take out a mortgage to buy stationery! 📎
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🔗 Matching Source to Purpose
A key principle in finance: match the term of the finance to the life of the asset or need.
- Buying a factory → long-term loan or mortgage (asset lasts decades)
- Covering a late payment from a customer → overdraft (short-term gap)
- Purchasing new vehicles → medium-term loan or leasing (asset lasts several years)
- Buying stock for the Christmas rush → trade credit (used up quickly)
Example: Using an overdraft to buy a new factory would be dangerous — the bank could call it in at any time! But using an overdraft to cover one month's wages while waiting for a customer payment makes perfect sense.
🤔 Factors Affecting the Choice of Finance
Choosing the right source depends on several factors:
- Purpose — what is the money for? (asset, working capital, expansion)
- Amount needed — small gap vs major investment
- Cost — interest rate, fees, or ownership dilution
- Time period — how long the finance is needed for
- Business type — sole trader can't issue shares; plc can
- Risk tolerance — debt increases financial risk; equity reduces control
In the exam, always JUSTIFY your recommendation by explaining WHY a particular source is appropriate for that specific business situation 📝