Short-term Funding Choices for a Company

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The objectives of a short-term borrowing strategy include the following:

• Ensuring that there is the capacity to handle sudden cash needs.
• Maintaining sufficient credit sources to fund cash needs.
• Ensuring that the interest rates obtained are competitive.
• Ensuring that a company’s effective cost of borrowing takes both hidden and explicit funding charges into account.

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 bankers’ acceptance. A borrower’s creditworthiness determines the interest rate it will pay and/or whether there will be need for collateral.
• Legal and regulatory considerations: There may be regulatory restrictions on the amount a company can borrow.
• Asset nature: Companies may have assets considered attractive as collaterals for secured loans.
• The flexibility of borrowing options: This ensures that there are no days when 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 sudden cash needs.

Solution

The correct answer is C.

Ensuring that 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 influences the interest rate it will pay.

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