Cash flows from operations may not be sufficient for a firm to keep up with grow

Question

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. 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.

Explanation / Answer

1.

Answer is "This statement is true and and advantage of short term financing."

Short term loans often have additional terms that work to the business's advantage, including the option to prepay the loan at any time without penalties. Short-term loans may have more flexible structures, such as interest-only loans with a balloon payment, the structure of many construction loans. These options enable small businesses to find a loan product that best suits their near-term needs.

2.

Liabilities that arise from purchases from suppliers made on credit is called "Trade credit".

3.

An obligation backed by collateral, often inventories or accounts receivable is called "Cash credit" or "Overdraft facility".

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