Reference no: EM13890241

Risk COLLAPSE From a borrower’s standpoint “short-term credit is generally riskier than long-term credit” (Brigham & Ehrhardt, 2013). Short term credit, even if it does have better rates than the long term alternative, would still require higher payments. The higher payment increases the risk such that a borrower may not be able to make the payment or make enough of them consecutively to fully repay the loan. This type of situation, should it occur during a recession, could force the firm to declare bankruptcy. If the borrower is borrowing money to fund a project, short term credit may not give the company enough buffer should the project not have the expected level of return on investment or have a longer timeline to launch due to hiccups not taken into account during than the initial planning period. This could lead the company to default on the loan which would hurt their ability to obtain credit in the future. Long term credit does have its disadvantages over short term credit. “Lenders will insist on a more thorough financial examination before extending long-term credit” (Brigham & Ehrhardt, 2013). While it may be more difficult to obtain based on the risk to the lending institutions long term credit, it will always be the least risky choice for the borrower should the unexpected happen. Business can be highly unpredictable and it is important that managers account for that unpredictability when making their credit borrowing choices