10. 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: There are often incentives to prepay short-term loans, unlike long-terms loans, where prepayment can be expensive. Identify whether the preceding statement is true or false. O This statement is false and a disadvantage of short-term financing. This statement is true and an advantage of short-term financing. 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. Short-Term Financing Source Description Liabilities that arise from firms buying materials that they will pay for at a later date An obligation backed by collateral, often inventories or accounts receivable