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good evening
my kaplan text says the following:
“some companies use overdraft as part of their long term finance, in which case the liquidity ratios will appear worryingly low. In such questions you could suggest that the firm rescedule the overdraft as a loan. Not only would it be cheaper …”
are not long term loans more expensive than short term loans?
also, can you please rank in order of more expensive the following:
overdraft
short term loan
long term loanregards
Overdraft borrowing will usually be at a higher interest rate (but this is not a rule). However, with overdraft borrowing you are only borrowing the amount you need day-by-day. With long-term finance you are borrowing a fixed amount (and paying interest on it) whether you need the money day-by-day or not.
It is not possible to rank the finance precisely in order of cost – it depends on the shape of the yield curve.
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