MACHAKOS UNIVERSITY

Reg No: D33-1528-2018

YEAR: 3 SEM 1

SCHOOL: BUSINESS AND ECONOMICS

DEPARTMENT:

BANKING,ACCOUNTING AND FINANCE

UNIT: CORPORATE FINANCE

UNIT CODE: BAC 308

LECTURER: OMWANSA

TASK: INDIVIDUAL ASSIGNMENT

Short-Term Financing is a need for money for a short period of time, i.e., less than a year. It is

one of the primary function of finance that manages the demand and supply of capital for an

interim period, and these funds can be secured or unsecured. To use such funds total financing

funds should be driven by the company, and the company gets directed by the risk-return trade-

off for this decision.

Advantages of short-term financing

1. QUICK PAY-OUT-If you're looking for a short-term loan, you probably need money
right now. Fortunately, a short-term loan application can be accepted within hours. This
is extremely useful in an emergency circumstance where you must make a payment right
away. Short-term loans do not have the same lengthy approval process as other forms of
loans. The majority of loan applications can be performed totally online or by phone. You
may get access to the borrowed funds the same day or the next business day, depending
on your bank or lender. The funds are transferred into your account immediately. Short-
term loans have a lot of advantages, including the ability to make a large impact for
people who need money now but don't have it.
2. OPPORTUNITY FOR BORROWERS WITH BAD CREDIT -short-term
loan lenders do not place a high value on your credit history when deciding
whether or not to approve you. Confirmation of job and a consistent income,
details about your bank account, and proof that you have no outstanding loans
are all more important. This is fantastic news for those with a limited or poor
credit history. You don't have to let your credit history stop you from acquiring
the cash you need to cover an unexpected need. Furthermore, rather than
hurting credit, short-term loans have the ability to help it. A short-term loan
might help you enhance or establish your credit history. Your credit rating will
increase if you repay your loan on time.
3. FLEXIBILITY-Several sorts of short-term loans provide incredible flexibility, which
is beneficial if you're low on cash right now but expect things to improve financially
shortly. You and the lender will design a payment schedule and agree on the interest rates
before signing for your short-term loan. Another benefit of a short-term loan is that it just
requires a short-term commitment. You don't have to worry about a hefty loan hanging
over your head for years if you can pay off your debt on time, which is usually within six
months. Instead, you can focus on the near future and getting out of your bad financial
circumstances.
4. NO COLLATERAL- Many short-term lending facilities for businesses with excellent
credit scores may not require collateral. If you have an unsecured line of credit, you won't
lose your home if you can't make your monthly payments. If you default on the loan,
some banks ask you to repay the line of credit through accounts receivable or inventory
sales.
5. GROWTH- If your cash flow isn't enough to keep up with your quick expansion, a
short-term line of credit can help. As your sales grow, you may find that you require
additional inventory. Instead of waiting until you have enough money to buy more, a
credit line is great for getting the products you need today. Asset-based lines of credit are
offered by some banks and allow you to borrow the greatest amount allowed based on
your accounts receivables and inventory. Seasonal businesses will discover that a line of
credit can assist them cover expenses during peak demand periods.
6. CONSTANT ACCESS- Some of the short-term credit lines are rotating. As you
repay the principle, that sum becomes available for use if you need it again. You simply
have to pay interest on the amount you owe. As long as you make the minimal monthly
payments, you can usually get this form of short-term credit without having to reapply.
Find out how to get your line of credit before signing the loan agreements to ensure you
can get the money you need quickly.
7. IMPROVED RATING- Opening a credit line could help you boost your credit score.
When your finances are in good shape and you don't need the credit right away, it's the
greatest time to create a line of credit. Make each month's payment on time once you've
started spending the money to assist enhance your credit rating. As a result, you may be
able to obtain a greater line of credit in the future.
Disadvantages of short-term financing

1. HIGHER INTEREST RATES- The most significant disadvantage of a short-term

loan is the interest rate, which is higher—often significantly higher—than that of longer-
term loans. A long-term loan has the advantage of a reduced interest rate over a longer
period of time. Interest payments, on top of repaying the short-term loan balance, can
result in greater monthly payments. Keep in mind, however, that with a short-term loan,
you'll be repaying the lender in a short amount of time, which means you'll be paying the
high interest for a shorter period of time than with a long-term loan. The longer you owe,
the more you'll have to pay in interest. Long-term loans may offer lower interest rates,
but you'll have to pay them back over a longer period of time. So, depending on your
circumstances, a short-term loan may be cheaper in the long run.
2. POTENTIAL DAMAGE TO CREDIT SCORE- While repaying a short-term
loan on time and according to the agreed-upon timetable will improve your credit score,
failure to do so can lead it to fall. A high-interest short-term loan will raise your debt-to-
income ratio, lowering your credit score. If you have little or no credit history, this can be
detrimental, and if you already have bad credit, it can be fatal to your future borrowing
ability. Be honest with yourself about your abilities and discipline when it comes to
repaying a short-term loan on time before taking one out.
3. DEBT CYCLE- If you have a habit of overspending, taking out a short-term personal
loan to make ends meet would simply exacerbate the problem. Some people become
trapped in a loop of making large expenditures and then running out of money for basics,
causing them to take out a high-interest loan. Then there's the matter of repaying the loan,
which puts a burden on their resources. If they don't rein in their spending, they'll require
another loan, perpetuating a cycle of debt accumulation and reliance. A short-term loan is
ideal for people who find themselves in an unforeseen emergency scenario and need
immediate cash that they wouldn't be able to save otherwise. Short-term loans have
 numerous perks and cons. Consider the top benefits and drawbacks of short-term loans to
determine if this financial tool is appropriate for your situation.
4. INCREASED RISK AND COST- Using short-term loans to fund long-term
projects can be costly. Because a long-term loan locks in the existing interest rate, it is the
best option. Interest rates climb over time in normal economic times. If you take out a
series of short-term loans to fund a long-term project, you may have to pay a greater
interest rate on each one, raising the project's cost. Another disadvantage of obtaining a
series of short-term loans is that your business may be in worse situation when the loan is
due to be renewed. You may have to pay a significantly higher interest rate depending on
the conditions. In the worst-case scenario, you will not be able to renew the loan. This
issue would not have arisen if you had taken out a long-term loan at the outset.

Long-term finance can be defined as any financial instrument with maturity exceeding one year (such
as bank loans, bonds, leasing and other forms of debt finance), and public and private equity
instruments.The one year cut-off maturity corresponds to the definition of fixed investment in national
accounts. Any financial instrument with a maturity of more than one year (such as bank loans, bonds,
leasing, and other kinds of debt finance), as well as public and private equity instruments, is considered
long-term finance. The one-year cut-off maturity conforms to the national accounts definition of fixed
investment. Any financial instrument with a maturity of more than one year (such as bank loans, bonds,
leasing, and other kinds of debt finance), as well as public and private equity instruments, is considered
long-term finance. The one-year cut-off maturity conforms to the national accounts definition of fixed
investment.

Advantage of long-term financing

1. Debt is the cheapest long-term funding option. It is the least expensive because:

* Debt interest is tax deductible,

* Bondholders or creditors view debt as a lower-risk investment with a lower return

requirement.

2. Debt financing allows the company's financial/capital structure to be more flexible. By

including a call provision in the bond indenture, the company's capital structure can be
made more flexible. In the event of an overcapitalization, the corporation might redeem
debt to bring its capitalization back into balance.
3. Bondholders are creditors with no say in corporate operations because they do not have
the right to vote.
4. The company can enjoy tax saving on interest on debt.
5. Long term loan provides an opportunity to the state to under-take large projects like constructions
of canals, hydro-electric projects, buildings, highways, hospitals, etc. As these loans are not to be
repaid at a short notice, so the government safely spends them on productive projects.
Disadvantage of long-term financing

1. Interest on debt is a constant cost to the business. Whether the company makes a profit or
not, it must pay a fixed rate of interest to bondholders or creditors. It is legally obligated

to pay debt interest.

2. Debt often has a predetermined maturity date. As a result, the financial officer must plan
for debt payback.
3. Long-term funding via debt is the riskiest option. The company is required to pay interest
and principal on a regular basis. The company will go bankrupt if interest and principle
payments are not made on schedule.
4. Restrictive covenants in debt indentures may limit the company's operating flexibility in
the future.
5. Long-term debt can only be used to raise funds if the company is large and creditworthy,
with assets that can be used as security.
6. If the government has accumulated large capital through long-term loans and no real assets exists
to pay off such debts, then it resorts to excessive taxation. Heavy taxation reduces the profits of
the businessmen and discourages the new industrialists to take up new enterprises.