Short-term Funding

The objectives of a short-term borrowing strategy include:

• Ensuring there is the capacity to handle sudden cash needs;
• Maintaining sufficient credit sources to fund cash needs; and
• Ensuring the interest rates obtained are cost-effective.

Several factors will influence a company’s short-term borrowing strategies:

• Size and creditworthiness: A company’s size influences the options it has at its disposal. A large company can access commercial paper and banker’s acceptance. The borrowers’ creditworthiness will determine the interest rate it will pay and/or whether collateral will be required.  
• Legal and regulatory considerations: There may be regulatory restrictions on the amount a company can borrow.
• Sufficient access: Borrowers can have a pool of sources from which they can access their funding and not rely heavily on a single financier. 
• The flexibility of borrowing options: This ensures that there are no days where significant debt matures, leading to large cash outlays. Additionally, the ability to make prepayments whenever possible without any penalties should be considered.

Question

Which of the following factors will least likely influence a company’s short-term borrowing strategies?

1. Size and creditworthiness.
2. Legal and regulatory considerations.
3. Capacity to handle cash sudden needs.

Solution

The correct answer is C.

Ensuring there is the capacity to handle sudden cash needs is an objective of a short-term borrowing strategy.

A is incorrect.  Size and creditworthiness is a factor influencing a company’s short-term borrowing strategy. A company’s size influences the options at its disposal, while its creditworthiness will influence the interest rate it will pay.

B is incorrect. Legal and regulatory considerations influence a company’s short-term borrowing strategy as there may be regulatory restrictions on the amount a company can borrow.