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:

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

Identify whether the preceding statement is true or false.

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.

Description

Short$-$Term Financing Source

Liabilities that arise from purchases from suppliers made on credit.

Unsecured, short$-$term promissory notes issued by large firms in denominations of $$100,000$ or more.