6. Short-term financing Why use short-term financing? Cash flows from operations may not be sufficient for a firm to keep up with growth-related financing needs, or the firm may not be able to always generate enough cash flow to maintain a surplus of cash. Firms prefer to borrow now to fulfill their capital requirements through means of short-term financing or long-term financing. Both methods have their advantages and disadvantages.

The following statement identifies a possible characteristic of short-term financing.

Consider this case:

Interest rates on short-term loans are more stable than long-term loans.

Identify whether the preceding statement is true or false.

1. This statement is false.

2. This statement is true.

Firms use a variety of short-term financing sources to support working capital. Use the descriptions in the following table to identify the short-term financing source.

Description Short-Term Financing Source A formal, committed line of credit extended by a bank or other lending institution ______________________.

An obligation backed by collateral, often inventories or accounts receivable _________________.