Short Term versus Long Term Funding

Summary

In this video, Shakti Ramtahan, a lecturer in accounting and finance, explains the difference between short-term and long-term financing for businesses. Short-term finance options like bank overdrafts are cheaper, more flexible, and easier to arrange, while long-term finance, such as equity or long-term loans, offers stability, less frequent replenishment, and lower banking fees. Ramtahan outlines the advantages of each, helping businesses understand how to manage their working capital needs effectively.

Takeaways

• 😀 Short-term financing helps cover working capital needs for businesses.
• 😀 Short-term financing options include tools like bank overdrafts.
• 😀 Long-term financing includes options such as equity or long-term loans.
• 😀 One key advantage of short-term financing is that it is cheaper in terms of interest rates.
• 😀 Short-term financing is flexible; you only pay interest on the balance of the overdraft you use.
• 😀 It's easier to arrange short-term financing, sometimes requiring just a meeting with your bank manager.
• 😀 Long-term financing offers security over a longer period of time.
• 😀 Long-term financing requires less frequent replenishment compared to short-term financing like overdrafts.
• 😀 One advantage of long-term financing is that it saves money on banking fees.
• 😀 Shakti Ramtahan is a lecturer in accounting and finance, providing insight into financing options.

Q & A

What is the primary purpose of business financing?

The primary purpose of business financing is to fund working capital needs, ensuring that the business can meet its operational expenses and maintain liquidity.

What are the two main types of financing options discussed in the script?

The two main types of financing options discussed are short-term financing and long-term financing.

Can you give an example of short-term financing?

An example of short-term financing is a bank overdraft, which allows businesses to access funds beyond their available balance for immediate needs.

What are the advantages of short-term financing?

The advantages of short-term financing include lower interest rates, flexibility in repayment (you only pay interest on the borrowed amount), and ease of arrangement, often requiring just a simple meeting with the bank manager.

What is a significant benefit of long-term financing?

A significant benefit of long-term financing is that it offers a longer repayment period, which reduces the financial pressure on the business.

How does long-term financing compare to short-term financing in terms of replenishment?

Long-term financing generally requires less frequent replenishment than short-term financing options like a bank overdraft, making it more stable for businesses with ongoing capital needs.

What types of long-term financing are mentioned in the script?

The script mentions equity (funds raised by selling shares) and long-term loans as examples of long-term financing.

How does long-term financing save businesses on banking fees?

Long-term financing tends to involve fewer transactions and less frequent adjustments, which can help businesses save on banking fees compared to short-term financing, which may require more regular management and payments.

Why is short-term financing considered more flexible?

Short-term financing is considered more flexible because businesses only pay interest on the portion of the overdraft they actually use, allowing for more control over cash flow and repayment.

What is the role of a bank manager in securing short-term financing?

The bank manager plays a key role in securing short-term financing by meeting with business owners and arranging overdraft facilities or other short-term financial solutions. This process is generally quicker and easier than long-term financing arrangements.