When a firm finances long-term assets with short-term sources of funding, it:

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Financing long-term assets with short-term sources of funding ignores the principle of matched maturities as it creates a maturity mismatch. This increases the risk of cash shortage as short-term funding sources may need to be regularly renewed, and if they cannot be renewed, the firm may face liquidity problems. Additionally, interest expenses may be higher as short-term funding sources typically have higher interest rates than long-term sources. The leverage ratio may also worsen as the firm's reliance on short-term funding sources increase.

When a Firm Finances Long-Term Assets with Short-Term Sources of Funding