The risk to the firm of borrowing using short-term credit is usually greater than if it used 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 temporarily unable to repay it.

Question

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This statement is true as short-term credit carries a higher risk due to the variability of interest costs and the fact that lenders may not renew the loan if the firm is unable to repay it. Long-term debt, on the other hand, provides more stability and certainty for the firm.

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