Question

12. 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:

Flotation costs for short-term loans are relatively lower than long-term loans.

Identify whether the preceding statement is true or false.

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

This statement is false and a disadvantage 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
Continually recurring short-term liabilities commonly generated from unpaid wages or taxes
Unsecured, short-term promissory notes issued by large firms in denominations of $100,000 or more

Answer 1

Flotation costs for short-term loans are relatively lower than long-term loans.

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

Explanation: Floatation costs are higher for long term debt than short term credit.

Description	Short term financing source
Continually recurring short-term liabilities commonly generated from unpaid wages or taxes	ACCRUALS
Unsecured, short-term promissory notes issued by large firms in denominations of $100,000 or more	COMMERICAL PAPER