–          The nature of short-term finance is that it tends to be risky in the sense of requiring the firm to frequently renew the principal amounts of financing outstanding; this could become a problem during ‘hard times’.

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–          The rates of return on financing either short or long term activities are best understood by considering the costs of the financing type.

–          Interest rates are not the reason for return or cost differences between short or long term finance.

–          The costs depend on reversibility differences between the types of finance. In situations where companies find themselves with unforeseen reductions in the need for financing, short-term finance is dispensed with (reversed) quickly at the end of its term.

–          Therefore short-term finance is less costly than long-term finance and because lower costs mean higher return, it also exhibits a higher return.

–          This is exactly opposite of the risk return characteristic of its assets.

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