Can short term funds be diverted for funding long term uses? If yes in which case?

Hello Samar,

Referring to your question. Here's my answer: 

From my personal perspective it should not be used short-term cash into long-term use

To answer this question we must first know the uses of short-term financing and long-term financing

 

 

First: short-termfinancing:-

We use available cash to fund working capital cycle, which is usually takes three to four months to complete successfully. 

The cycle of working capital consists of:-

 

 1- Cash ..2- Buy raw materials  ..3- Manufacturing products  ..4- Finished products ..5- Selling products  ..6- Collection.

 

Collection phase is the last stage, which shows the success of the session, which could be called to the stage of "From cash to cash"

 

 

Second, uses long-term financing: -This is done in the form of the purchase of fixed assets such as ..: Lands Real Estate .. cars .. machinery and equipmentOf course, these assets are unproductive and therefore the subject of conversion of these assets

 

This non-productive assets and the subject converted to cash within a short period is difficult to achieve

 

From the previous explanations it can be seen that the use of short-term funding in the long-term financing resulting negative working capital, imbalance in liquidity and also the inability to repay short-term obligations

 

The opposite is true in terms of the possibility of the use of long-term financing in the short-term financing

I hop that my answer be clear 

 

Montasser M. Salah

Financial & Banking Consultant

 

 

The key component to measure the financial risk appears whenNature behavioral control of the assets of the institutions,Compared to the contractual nature of those assets when classifiedAccording to interest rate risk and liquidity risk.(It will be discussed behavioral characteristics versus contractual characteristics of the assets in this note below).

 

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This is a "vicious sin" of a corporate banker to do! 

Normally, Short-term Funding is directed towards the working capital needs (Opex) while Long-term funding is directed towards capital expenditure (Capex). Directing short-term funding towards long term uses (in most cases) is the major cause of borrowers default! In my practical life, I came across poor uninformed customers who either on their own, or via inexperience of the credit analyst were offered such vicious structures, causing "Tenure Mismatches" and effective default!

 

Having said that, and while tenure matching to the Asset Conversion Cycle should be in mind of the credit analyst, I have seen in my life long-term structures channeled towards short-term uses (e.g. Medium term loan funding drawn down to finance short-term working capital needs and repaid over a medium-term installments). While this may not cause borrower default, the risk is providing an opportunity to the borrower to misuse the facility in other purposes not intended for the original granting of the facility.  

No. Because short term financing has to be paid earlier while long term investment will generate cash much later. Hence there will be mismatch of cash flows

Companies should not. However, banks do it all the time.

A a Bank credit officer, I am not in favour of diverting the short terms funds to long term uses. It hampers the liquidity position.

when the long term use is required for immediate need and has direct impact on the business growth of the company then it can be allowed to a reasonable extent 

No. Because short term financing has to be settled earlier while long term uses will generate cash much later. Hence there will be mismatch of cash flows

No, short term funds must not be diverted for funding long term uses. It is not advisable in any case - it is suicidal. 

Yes, short term funds can be diverted into long term funds when it becomes delinquent, financial institutions convert it into term loan(long term loan) to pay with monthly EMI to eliminate the burden of debt, boosting revenue, enhancing business ratios & avoiding the risk of default

Not at all because short term funds are used in financing the working capital of the business which takes between 1-4 months to cycle out. When short term funds are used for long-term project it can suffocate the business and lead to it collapse. It is not Prudent to do so.

No, short term funds should not be used for long term purposes as this will create liquidity problems as well as maturity Mismatch