short-term and long-term finance needs of a business

Short‑Term Finance

💡 Short‑term finance is money used to cover day‑to‑day running costs. Think of it as the cash you keep in your wallet to buy a coffee or pay a friend back.

• Paying staff wages and rent.
• Buying raw materials for production.
• Covering utility bills and maintenance.

Typical sources:

1. Bank overdrafts
2. Trade credit from suppliers
3. Short‑term loans (≤ 12 months)

Long‑Term Finance

📈 Long‑term finance funds major projects that take years to pay back, like building a new factory or launching a new product line.

• Purchasing machinery or property.
• Investing in research & development.
• Expanding into new markets.

Typical sources:

1. Long‑term bank loans (≥ 5 years)
2. Issue of corporate bonds
3. Equity financing (selling shares)

Exam Tip 🚀

When answering questions, use the acronym SCAL:

1. Short‑term: Supply of cash for daily needs.
2. Cash flow: Cash required now.
3. Appropriate source: Appropriate financing option.
4. Long‑term: Leverage for growth.

Remember to explain why a particular source is chosen and how it affects the business’s future.