- Mis-Matched Financing

Avatar

By PATH by Simplex Support Team

updated 7 months ago

Overview:

“Mis-Matched Financing” occurs when the supply of finance does not meet demand. One of the main reasons for this capital market imperfection is information asymmetries between lenders/investors and borrowers which lead to adverse selection and moral hazard.

Definition:

“Finance Mismatch” occurs when the demand for finance is not met by supply or vice versa. In a context of innovation it refers to potentially profitable innovation projects that might not receive access to external sources of finance.

The Home Run Financial System Calculation

Change in Long Term Debt + Change in Retained Earnings = Change in Gross Fixed Assets

Tip: Did you use the right debt product to buy assets for your company?

Mis-matched financing is a silent killer of businesses by pulling additional cash from operating expenses in the form of additional interest charges. Short term debt is typically more expensive than long term debt. You should evaluate how you have financed your gross fixed assets and convert any that were paid for with short term debt products, into a long term product that matches the useful life of the asset. For example, a vehicle that was bought with a line of credit, should be converted to an auto loan with a term length equal to the depreciation schedule of the auto.

Did this answer your question?