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:

Short-term loans usually have a lower cost than long-term loans.

1. Identify whether the preceding statement is true or false.

a. This statement is false and a disadvantage of short-term financing.

b. This statement is true and an advantage of short-term financing.

2. 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.

Continually recurring short-term liabilities commonly generated from unpaid wages or taxes.	c.
An obligation backed by collateral, often inventories or accounts receivable.	d.

c.& d.

Trade credit Secured loan Revolving credit agreement Commercial paper Accruals