Short and long term financing both present valuable options for a business looking to grow and succeed. Business financing in general is critical for effective cash flow management and can make or break the achievement of business goals.
So, which is better: long term financing or short term strategies?
The reality is that both options present pros and cons, so in this article we’ll break down the differences between each to help you make the informed, smart choice.
Long Term Financing
The term ‘long term financing’ refers to acquiring funds or lines of credit for an extended period of time, typically a year or more.
Long term financing is particularly useful for large capital investments and projects which require access to working capital over prolonged timelines. Examples of long term financing include business loans and equity financing.
Pros
Stability
Long term financing options provide businesses with stability in their access to capital. This can make cash flow management easier and less stressful once the financial facility is initially set up.
Predictability
On the other side of the transaction, monthly repayments of a business loan, for example, gives a measure of predictability to businesses. This too can make it easier for businesses to manage cash flow and make strategic financial and budgetary decisions that are in the best interest of the company. With a fixed interest rate, the predictability only increases.
Investing in Growth
For businesses looking to grow and scale, long term financing provides businesses with greater opportunities and capabilities. Whether you need large scale equipment upgrades or asset expansion, or you just need the agility to respond to opportunities in the market, the right long term financing option can enable just that.
Low Interest Rates
As referred to before, predictable and low interest rates can not just save a business money in the short term but also provide financial stability long term. Long term financing often provides more avenues for fixed and/or lower interest rates to reduce the overall cost of borrowing.
Cons
Rigidity
With the stability and predictability of long term financing comes a long term commitment. Your business may be limited in its flexibility to adapt to some changes in market conditions or other unforeseen circumstances due to the more permanent nature of the financial solution.
Repayment Term
As mentioned above, long term financing tends to offer lower interest rates. However, the extended repayment period can mean that your business will still accrue more interest over time and raise the overall cost of the financial facility.
Collateral/Security
For small businesses, long term financing can be difficult to obtain both from an eligibility criteria and due to the collateral requirements. All lenders are different in their offerings, but having sufficient assets to serve as security for a financial arrangement can be a challenge for some business owners.
Short Term Financing
Short term financing, in contrast to long term, refers to a business obtaining funds for a shorter period of time, typically less than a year.
This form of finance tends to be accessed for more immediate operational needs. For example, it could be used to fill in gaps in cash flow, manage seasonal sales fluctuations or purchase new equipment and inventory. Some common examples of short term financing include Invoice Financing and Trade Finance.
Pros
Flexibility
Short term finance offers businesses more flexibility, which can be critical when adapting to market opportunities or business changes. For small and medium sized enterprises, this can be especially important if an unforeseen challenge to cash flow management presents itself.
Fund Access
Crucially, short term finance allows quicker and more streamlined access to necessary funds. This can enable a business to respond to unexpected expenses or meet daily operational expense challenges in a more financially secure way.
Cost
The total cost of a short term financial arrangement can still be lower than the overall cost of a long term solution, despite higher interest rates, because of the shorter repayment period. The shorter the repayment period, the less interest is accrued.
Cons
Interest Rates
It should come as no surprise that short term financing often comes with higher interest rates. Whether or not a fixed rate is available by the financial institution you are dealing with, the higher rate can mean an increase in the cost of borrowing for your business.
Limited Funding Scope
Short term financing may not be suitable for larger capital investments or more long-term projects. For some businesses looking to grow and scale, this can limit the ability of a short term solution from enabling them to achieve their objectives.
Cash Flow Strain
More frequent repayments, which can be a feature of short term financing, can put a strain on a business’s cash flow. Not managed well, this can prove to be challenging during tighter economic climates or when there is a shock to a company’s cash flow.
ScotPac – the #1 non-banking lender across Australia
Choosing between short and long term financing options for your business requires careful and individual consideration. While both options have their pros and cons, your business’s requirements and goals should be taken into account.
Fortunately, the specialist lenders here at ScotPac have access to and experience in a wide range of financial solutions. We work with our clients as partners, and don’t view them as transactions. What does this mean for you? It means we’ll find the right tailored financial arrangement to add the fuel you need to ensure your business enjoys rocket-powered growth.