CAF-7 · Chapter 12 · Question 14 of 15
Which of the following is a primary disadvantage of financing working capital entirely through short-term debt (such as an overdraft) rather than long-term debt?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Short-term debt carries high renewal risk and subjects the company to fluctuating, volatile interest rates
Explanation
Short-term debt (like overdrafts) can be withdrawn by the bank at any time (renewal risk) and is subject to variable interest rates, exposing the company to significant liquidity and market risks if economic conditions tighten.
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