Why might a firm use short-term sources of funds? Which is typically more flexible and easier...

Why might a firm use short-term sources of funds? Which is typically more flexible and easier to access, short or long term debt? Why might a firm prefer long term debt over short term debt?

Expert Solution

Short term funds are used by firms to fund their working capital and operational needs. Firms need to maintain a stable cash cycle over the daily or monthly operations to fund their suppliers, manage inventory and receivables to maintain efficiency in operations. If the firm does not employ these short term fund sources, it could result in a liquidity crisis and fund cruch. Typically , short term funds are more easier and flexible to achieve as creditors have low risk on these funds considering that the amount can be backed by current assets like inventory or receivables. These short term funds also can be flexible in loan terms and repayment in the form of an over draft or cash credit facility.

A firm might prefer long term funds, as these funds can be used to fund the growth in the form of investments and also any excess can be used to fund working capital requirements. Thus, long term funds can be used to fund both short term and long term used. Long term funds decide the growtnh trajectory of the firm and the strategic direction of a firm.

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