Many companies secure financing from various sources with various payback periods. Not all funding sources are the same, and in fact, some can come with a pretty high cost to the firm. These costs could include high interest rates, long payback periods, and increased ownership in the firm which could result in lost control.

Please analyze the funding options listed, and determine if the option is usually a short-term or long-term strategy.

a. Line of credit
b. Commercial paper
c. Trade credit Bank loan of 10 months
d. Bond
e. Stock
f. Bank loan of 20 months

A line of credit is a long-term strategy because businesses obtain lines of credit for their use over long periods of time. The particular characteristic is that a line of credit is only used when the business decides to do so, so it works almost like a credit card.

b. Commercial paper - Short-term strategy

Commercial paper is a short-term debt that is issued by firms when they have problems to pay operating expenses. They are unsecured, and pay a specific amount of interest.

c. Trade credit Bank loan of 10 months - Short-term strategy

In financial accounting, loans that last for less than a year are categorized as short-term liabilities, therefore, a trade credit bank loan of 10 months is a short-term strategy.

d. Bond - Long-term strategy

While some bonds are issued for the short-term, the majority of them are issued for the long-term, with some of them lasting 10 years or more.

e. Stock - Long-term strategy

Buying or issuing stock is also a long-term strategy, specially because the dividend of the stock is only paid out once every year, unlike other debt instruments that pay interest immediately.

f. Bank loan of 20 months - Long-term strategy

A bank loan of more than 1 years is considered a long-term liability in financial accounting, therefore, a bank loan of 20 months is part of a long-term strategy.

jayilych4real jayilych4real · Answer 2 · 2025-03-29T08:06:27-04:00

Analyzing the given funding options and placing them in their right categories would be:

A. Line of credit - Long-term strategy
B. Commercial paper - Short-term strategy
C. Trade credit Bank loan of 10 months - Short-term strategy
D. Bond - Long-term strategy
E. Stock - Long-term strategy
F. Bank loan of 20 months - Long-term strategy

A long term strategy is one which financial institutions use to secure their assets for the foreseeable future while a short term strategy is used for short term gains on stocks and finances.

With this in mind, we can see that there are different funding options which are short or long term as the case may be, which depends on the amount of profit which the business wants to accrue.