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

Question

Quizplus · Accepted Answer

Financing long-term assets with short-term sources of funding goes against the principle of matched maturities, which is a fundamental principle of corporate finance. This practice increases the risk of cash shortage as the short-term funding may not be available when the long-term asset needs to be financed. Also, short-term sources of funding usually have higher interest rates than long-term sources, which can result in higher interest expenses for the firm. Therefore, this is not the best practice for a business.

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