Question

Explain why you would use either short term or long term financing for managing working capital.

Answer 1

I would prefer to use short term financing in order to manage the working Capital.I would be choosing short term financing over long term financing for management of working capital because-

1. Short term financing with offer me with the kind of liquidity I always want, because they can be highly liquid in nature and since the working capital requirements are also shorter they would be appropriate.

2.it would also help in matching my liabilities with my cash flows which are of short-term, because working capital is mostly short term in nature and it can be managed better with short term financing.

3.short term financing are highly flexible in nature than long term financing and they should be preferable in the short term for management of working capital.

4.financing short term capital needs with long term financing is always disastrous for a company because it cannot refinance it's projects as the duration is higher.

so, because of the above listed reasons I would be more inclined towards using of short term financing for management of working capital rather than use of long term financing for management of working capital.