The risk to the firm of borrowing using short-term credit is usually greater than with long-term debt. Added risk stems from greater variability of interest costs on short-term debt. Even if its long-term prospects are good, the firm's lender may not renew a short-term loan if the firm is even only temporarily unable to repay it.

Question

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The statement is true. Short-term credit carries more risk as interest costs can vary significantly and lenders may be unwilling to renew short-term loans, even if the firm has good long-term prospects.

The Risk to the Firm of Borrowing Using Short-Term Credit