(i) The purpose for which the money is required (matching)
In general its is preferable that the life of the project under review should not
exceed the period for which the money is borrowed. It may be inconvenient for
example if an investment if fixed asset having a working life of 20 years was
financed by a five year loan.
(ii) Relative cost of different forms of finance
This is a question that has to be considered in each case. As a general point, if
interest rates generally are high but are expected to fall longer term finance is
preferable.
(iii) Flexibility –Short term loans are more flexible since a firm can react to changes
in interest rates unlike long term loans.
(iv) Repayment pattern –a short term loan may be payable any time cash is
available unlike long term debt.
(v) Availability of collateral –a security is required for long term debt unlike
short term debt.
(vi) The liquidity of the business
If the liquid ratio is low, it may not be possible to obtain further finance without
causing concern to creditors.
(vii) Availability –the question of what is available will influence whether the
borrowshort or long term debt.
Kavungya answered the question on December 14, 2021 at 08:17
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Required:
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(B). The company thinks that...(Solved)
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