Why do the private commercial banks prefer short term lending Or, Advantages of Short-Term Financing

 1. Easier to provide: Banks can provide short–term credit more easily within the minimum functionality than long-term credit.

2. Higher interest: Banks may impose the higher interest rate due to small amount of credit with the minimum or security less financing.

3. Rapid turn-over of capital: The capital investment is turning over rapidly and it make chance to further investment

4. Minimum cost of capital: Whether, the short-term credit makes the rapid turn- over of capital investment, thus it may reduce the cost of capital.

5. Minimum risks: Due to minimum time frame, the repayment of loan may cover in earlier. Thus, the risk is lesser than the long term credit.

6. Easy control over the customers: Banks can overlook more easily to the short- term borrowing customers than the long-term borrower.

7. Flexibility to lend: It is more flexible in the sense that the banks lends as the borrowers are needed and repay then in due time.

8. Minimum complexity: The maintenance and supports of further credit procedures is simple than long-term finance.

9. Fund availability: In many cases, commercial banks prefer to maximize the fund availability particularly small enterprises.

Distinguish between long term credit and short-term credit

 

Particulars	Long Term Credit	Short Term Credit
1. Definition	A form of finance that have a small, mid or long repayment schedule	A form of finance that have a short repayment schedule
2. Maturity period	1 to 5 years, in some cases it may be 20 years	1 or less than 1 year
3. Competitive interest rate	competitively marginal or low rate	competitively high rate
4. Lending complexity	Some complex to lending except short-term lending	Easy to lending
5. Profitability	Marginal profit	High margin of profit
6. Risk	Marginal or high risk	Low risk
7. Loan limit	Loan limit is more	Small Loan limit
8. security	need of temporary, permanent & valuable property as a	No need of permanent or valuable property as a

Why the private commercial banks discourage to consider long term loans

 Most of the time the private commercial banks discourage to finance the long term loans due to some relative risky and problems. These are:

1) Lower Rates: Long-term loan normally have lower interest rates than short- term credits.

2) Slow Cash Inflow: A long-term debt obligation also prevents the faster cash inflow.

3) Risk Involvement: Generally, the level of the interest rate is depends upon the risk involved with making the loan. In case of default, long-term loan includes a greater span of time.

4) Credit turn-over loss: The long-term loan will be paid over a loan period. So the lender get recovered the amount by a long period as the lender has missed the rapid credit turn over.

5) Long term debt is often costly to service

6) The cost of capital is higher in case of long term debt