Question

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interest of the lender. a. True b. False

Answer 1

Answer:

The correct answer is False.

Explanation:

Commercial credit has its importance in that it is an intelligent use of short-term liabilities of the company to obtain resources in the least expensive way possible. For example, accounts payable constitute a form of commercial credit. They are the short-term credits that suppliers grant to the company. Among these specific types of accounts payable are the open account which allows the company to take possession of the merchandise and pay for them in a certain short term, the Commercial Acceptances, which are essentially checks payable to the supplier in the future, the Notes which is a formal recognition of the credit received, the Consignment in which no credit is granted and ownership of the goods never passes to the creditor to the company. Rather, the merchandise is sent to the company with the understanding that it will sell it for the benefit of the supplier, withdrawing only a small commission for the utility.

A long-term loan is usually a formal agreement to provide funds for more than one year and most are for some improvement that will benefit the company and increase profits. An example is the purchase of a new building that will increase capacity or machinery that will make the manufacturing process more efficient and less expensive. Long-term loans are usually paid from the profits. Mortgage: It is a conditional transfer of property that is granted by the borrower (debtor) to the lender (creditor) in order to guarantee the payment of the loan. Importance: It is important to note that a Mortgage is not an obligation to pay since the debtor is the one who grants the mortgage and the creditor is the one who receives it, in case the lender does not cancel said mortgage, it will be taken away and will be transferred to the borrower. It should be noted that the purpose of the mortgages by the lender is to obtain some fixed asset, while for the borrower it is to have security of payment through said mortgage as well as to obtain a profit from it through the interest generated. For the borrower it is profitable due to the possibility of obtaining a profit through the interest generated from said operation.