Question

If a company is performing well and profitable what are some reasons it would seek out short term financing?

Answer 1

Reasons to seek out short term financing even in case of good performance and profitability can be -

1. To purchase inventory at low cost - Many suppliers offer cash discount if payments are made before specified time. In this case short term financing helps a company to purchase inventory at discount which decrease company's cost.

2. To cope up with seasonal trends - Seasonal business requires additional capital to run business at peak time. In this case short term finance bridges the gap.

3. Emergencies - Uncertainty can happen anytime, to meet unexpected emergency short term finance helps.

4. Working capital - short term financing also helps company to meet its working capital requirements.

Short term financing is a easy and better way to meet regular expenses but it should be use wisely.