If a firm uses short-term sources of finance instead of long-term, its financial risk is increased.

Question

If a firm uses short-term sources of finance instead of long-term, its financial risk is increased.​

Quizplus · Accepted Answer

Short-term sources of finance have a higher risk of default, as they are due for repayment within a shorter period. Long-term sources, on the other hand, have a lower risk of default, but they come with higher interest rates. Therefore, a firm that relies on short-term sources of finance instead of long-term is increasing its financial risk.

If a Firm Uses Short-Term Sources of Finance Instead of Long-Term