Is bank credit a short term or long term source of finance?

1 Answer | Add Yours

lorrainecaplan's profile pic

Lorraine Caplan | College Teacher | (Level 1) Educator Emeritus

Posted on

A line of credit with a bank is generally considered a short-term form of financing, often an unsecured debt, available to a business that has an existing relationship with a bank, usually in the form of deposits.  Long-term financing is generally secured by an asset, such as land, a building, or durable equipment.  The interest rates on a line of credit are generally higher than they will be on long-term financing.  If you can picture what these mean in one's personal life, a bank line of credit is like a credit card, while long-term financing is like a mortgage or a car payment.  As a rule of thumb, any debt that is expected to be paid off in six months or less is likely to be considered a short-term debt, short-term financing, and any debt expected to be paid off for a longer period is likely to be considered long-term debt, long-term financing.  If you are expected to list liabilities in their order of duration, accounts receivable would probably be first, then credit card debt, then a bank line of credit, and finally, long-term debt such as mortgages, loans for equipment, or loans for vehicles. 

Sources:

We’ve answered 318,991 questions. We can answer yours, too.

Ask a question