Short-term and long-term financing. Which one to choose?

Just as in people's lives, the progress of companies requires daily decisions for their operation and continuity. Choosing between short-term or long-term financing is one of them.

The vast majority of companies require financing to be born, operate, develop and grow regardless of their nature, size, sector, strategy, location.

Every day is full of decisions, that is why the lives of people and companies are very similar. For people, immediate decisions such as blinking, breathing and eating are vital for their growth and development. For companies, financing is vital to be born, operate, develop and grow regardless of their nature, size, sector, strategy, location. The real decision to consider is, short-term (CP) or long-term (LP) financing? Which one to choose?

What is debt?

Debt must be understood as a management and growth tool that is based on expectations. That is, the financier will not analyze if you have the money at this moment, but rather show that you can generate it in the future.

Short-term financing.

Short-term financing is usually used to meet more immediate recurring operating commitments and/or cover any shortfall in cash flow generation. It is generally used to cover working capital payments, payroll payments, operating expenses, among others.

Short-term debt is commonly offered by banking institutions with floating interest rates and terms of one year, but not longer than five years.

Long-term financing.

Long-term financing must be understood and used for other types of decisions that are not operational, but rather growth and expansion. Now that you know about Short-Term Financing, some very clear examples of long-term financing are the purchase of some real estate, new equipment, capital assets, inorganic growth, even the purchase of shares from another partner.

Long-term debt is used to finance decisions that take more than a year to repay. This type of liability is offered by traditional banks, as well as by institutional investors in terms of five to 25 years or more. By using the LP, it is possible to protect the cash and liquidity of the business to also meet short-term commitments.

How to choose?

It is essential to know if the financing that the company needs is to operate on a day-to-day basis or to grow and develop in the medium or long term. Thus, the period of the debt must be directly related to the time in which the action or project to be executed will be carried out.

Once the above is known, it will be time to explore the different options offered by financial institutions where other decisions merely related to the type of debt chosen will have to be taken into account.

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Bandenia Challenger bank Limited is an international trade facilitation and investment brand created to manage and solve global trade finance documentary needs.