What is an aggressive financing strategy?


Quick Answer

An aggressive financing strategy is a financing strategy under which a company funds its seasonal requirements with short-term debts and its permanent requirement with long-term debt. Its heavy reliance on short-term financing makes it riskier because of interest rate swings and possible difficulties in obtaining short-term quickly when seasonal peaks occur.

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Full Answer

Its operations are conducted on a minimum amount of working capital. The advantage of aggressive financial strategy is that it increases return on profitability by taking advantage of the cost differential between long-term and short-term debt. It is less expensive compared to conservative strategy and provides the company with greater profitability. The disadvantages of this strategy are it is exposure to risk arising from low working capital position, and it puts too much pressure on short-term borrowing capacity so that it may have difficulty in satisfying unexpected needs for funds. The risk of an aggressive strategy is that it seldom yields the high profitability being planned to achieve. Lack of liquidity is the greatest risk in this strategy. The high risk and high return nature of this strategy should be considered by the firm before its implementation. Unless they believe that they can afford the possible significant losses, this kind of strategy should be avoided. If the company and its decision makers are risk takers rather than risk-averse then they may implement aggressive financing strategy.

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