List and explain five factors that should be taken into account by a businessman in making the choice between financing by short-term and long-term sources

CPA-Financial-Management-Section-3 Revision kit

(a) In deciding whether to go for short term rather than long term finance the following would be taken into account.

(i) The purpose for which the money is required (matching)
In general its is preferable that the life of the project under review should not exceed the period for which the money is borrowed. It may be inconvenient for example if an investment if fixed asset having a working life of 20 years was financed by a five year loan.

(ii) Relative cost of different forms of finance
This is a question that has to be considered in each case. As a general point, if interest rates generally are high but are expected to fall longer term finance is preferable.

(iii) Flexibility –Short term loans are more flexible since a firm can react to changes in interest rates unlike long term loans.

(iv) Repayment pattern –a short term loan may be payable any time cash is available unlike long term debt.

(v) Availability of collateral –a security is required for long term debt unlike short term debt.

(vi) The liquidity of the business
If the liquid ratio is low, it may not be possible to obtain further finance without causing concern to creditors.

(vii) Availability –the question of what is available will influence whether the borrow short or long term debt.

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