Can you help me understand this question?
Write a paper comparing long and short term financing. Describe situations in which each type of financing would be used.
In business the requirement of loan is always there. You need to buy land, machinery, construction of the work shed. This type of expenditure requires long term finance. you can pay it over a long period out of the earnings of the business If the business is paying one should never lose the opportunity to expand it further. Naturally it will require funds to invest to buy better machinery, expand the area of work place to install it. You will need loan for all these. You will approach a bank to grant you this loan. You will work out the period over which the business will enable you to earn enough to repay it. Bank will examine your financial statement and suggest you the reasonable period for it without affecting your business. You both agree on the projections of the earning every year and based on that will decide the period.
You require short period of time to convert your current assets into cash. You manufacture some item or take job order from others and then supply them to your customers. Your customers will in turn require some time to sell your products. They will pay you when they are able to sell the entire item and pay you. For duration of this entire circle of converting the raw-materials into products-in-process to finished goods you will require funds to pay your daily business expenses. Normally the entire circle requires 180 days to complete. The loan you seek for this purpose is called short term or working capital.
LOANS; LONG AND SHORT TERM.
No prudent businessman can run his business without a long or short term capital. The purposes of both are different but are required. The duration of loan is long or short depending upon the use and requirement.
If he is adventurous enough to invest his entire life's savings he will not have any left to weather any emergency - personal or business.
LONG TERM LOAN:
Let us first deal with the Long Term Loan.
It is required for over a period longer than one year to, in some cases may be up to 25 years. It is generally required to acquire fixed assets like land, machinery, expansion, development and research of any new ...
Why the finance is required? When it should be for long term or short term? How to use it? Finance is essential when the business is paying back and / or expanding. No prudent man will take the risk of investing his hard earned savings for the business. You can buy a very costly item by making payment in installments but if you can afford and utilize hard earned savings for the same you would have hardly left any for other purposes as explained in the following example. Let me quote an example here. You want to buy a house. You go for a housing loan from a bank and pay for it in the small amounts over a period of time. However, if you choose to buy the same with your savings you would have hardly left any for fully furnishing it according to your long cherished desire. This is long term finance. But if you are interested in buying say a coffee percolator of good make you will utilize your debit or credit card and make on the spot payment. It is short term finance.