Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short-term basis? Why?

Question

Business

Daniel Rocha

22 December, 02:17

Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short-term basis? Why?

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Answers (1)

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Janessa Cross · Answer 1

Borrowing on a long-term is better.

Explanation:

During recession, sales and revenue declines due to the decrease in consumers' spending and low economic activity, profit and cash flow drops, interest rates are low and unemployment rises.

Borrowing on a long-term is better during recession better recession is not static. According to the phases of business cycle, after recession (contraction), we have trough, then expansion and peak period. And this business cycle vary from more than one year to 10 or 12 years.

Long-term loan also varies from more than one year to 15 years or more. So by the time the economy recovers from recession, paying interest on the debt will not be a problem.

Short-term loan is usually within a year. Going for this is discouraged because during recession, sales decrease, cash flow drops. So paying interest and the principal on this loan will be extremely difficult, thereby, exposing the company to liquidation. The company becomes a going concern.