Question

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.

(A) True
(B) False

Answer 1

The correct answer is (A) True.

Step-by-step explanation:

Short-term financing, such as trade financing, often entails guarantees such as accounts payable or inventories. A company undertakes to deliver or sell its amounts receivable from the creditor in exchange for immediate cash (also called factoring). Although certain loans for companies and types of project financing are generally intended for a specific purpose such as construction or purchase of equipment, short-term loans such as loans for working capital are usually used for general purposes and support the general business activities of a company. company.

The environmental and social issues related to a short-term financing transaction range from minimal to complex and vary depending on the size, industrial sector, location, and the company's commitment to manage environmental and social risks. Since a loan for working capital offers general support to a company, and is not intended for the purchase of equipment or expansion, the financial institution is exposed to the borrower's global risk, which includes possible environmental and social issues.