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. This statement is false. 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. Short-Term Financing Source Description A formal, committed line of credit extended by a bank or other lending institution. An obligation backed by collateral, often inventories or accounts receivable. This statement is true. Commercial paper Firms use a variety of short-term financing sources to support working capital. Use the financing source. Accruals ble to identify the short-term Revolving credit agreement Trade credit Secured loan Description A formal, committed line of credit extended by a bank or other lending institution. An obligation backed by collateral, often inventories or accounts receivable. This statement is true. Revolving credit agreement Firms use a variety of short-term financing sources to support working capital. Use the financing source. Secured loan ble to identify the short-term Commercial paper Accruals Description Trade credit A formal, committed line of credit extended by a bank or other lending institution. An obligation backed by collateral, often inventories or accounts receivable