Short-term vs long-term debt: Optimising your financing mix

The golden rule that many businesses ignore

There is a fundamental principle in financial management that, surprisingly, many businesses fail to observe: financing should be matched to the time horizon of the asset it funds.

In practice, this means that an asset generating returns over ten years should be financed with long-term debt. An asset that converts to cash within ninety days — such as inventory or trade receivables — should be funded with short-term facilities. When this match breaks down, liquidity problems follow.

The most common example of this mismatch: a company that finances the purchase of machinery with a one-year revolving credit facility. When the facility matures, the asset has not yet generated enough cash to repay the loan, and the business is forced to refinance — if it can — or face a liquidity crisis. This violation of the matching principle is, in fact, one of the most frequent causes of liquidity distress in mid-market companies that are otherwise operationally sound.

What short-term debt actually is — and what it is for

Short-term debt — with a maturity of less than twelve months — encompasses instruments such as revolving credit facilities, overdrafts, invoice discounting, factoring, and trade finance lines. Its natural purpose is to cover working capital needs: timing gaps between receipts and payments, seasonal production peaks, or inventory purchases that will turn over quickly.

Its advantages are clear:

• Greater flexibility: drawn when needed and repaid when cash is available.
• Generally lower headline interest rates, though this can vary depending on the rate environment.
• No long-term commitment to a fixed capital structure.

Its risks, however, are equally real:

• Refinancing risk: if market conditions tighten or a lender reduces appetite, renewing a facility can become difficult or prohibitively expensive.
• Cash flow pressure: frequent maturities require very tight treasury management.
• Unsuitable for investment: using short-term debt to finance fixed assets or projects with a long payback period is one of the most common causes of technical insolvency.

And long-term debt?

Long-term debt — with a maturity exceeding one year, typically between three and ten years in the mid-market segment — includes term loans, finance leases, corporate bonds and commercial paper, subordinated debt, and hybrid capital instruments.

Its natural purpose is to finance assets that generate returns sustainably over time: machinery, plant and equipment, vehicles, technology development, capacity expansion, or acquisitions.

The advantages of long-term financing include:

• Financial stability: liabilities do not mature in the near term, removing immediate refinancing pressure.
• Alignment with the business plan: amortisation schedules can be designed around the expected cash generation of the financed project.
• Protection against tighter credit markets: a business that has already structured its financing at long tenor is not dependent on market access at any given point in time.

Its drawbacks include:

• Higher cost, in general, reflecting the term premium and the greater risk assumed by the lender.
• Less flexibility: early repayment typically carries a penalty, and covenants can impose operational constraints.
• A long-term commitment to a capital structure that may become obsolete.

The optimal balance short-term vs long-term debt: there is no universal formula

There is no single ideal ratio between short-term and long-term debt that applies to every business. The right balance depends on several factors:

1. The nature of the business and its cash conversion cycle

A manufacturing company with significant fixed assets and long production cycles requires more long-term financing. A distribution company with rapid inventory turnover and fast collections can operate with a higher proportion of short-term debt. Analysing the cash conversion cycle — the number of days between paying suppliers and collecting from customers — is the essential starting point.

2. The stability and predictability of cash flows

A company with recurring, predictable revenues can sustain a higher proportion of short-term debt because it has reliable visibility over its repayment capacity. A business with volatile or seasonal revenues needs more long-term financing as a buffer against having to refinance during periods of weak liquidity. Equally, sectors with regulated or contracted revenues — energy, infrastructure concessions, real estate — can support long-term debt structures with tighter interest coverage ratios than businesses in high-variability sectors.

3. The company's credit profile

The relationship between credit quality and debt maturity is less linear than it might appear. The strongest companies can borrow short-term with confidence in their continuous ability to refinance. Mid-quality borrowers, however, have a particularly strong incentive to lock in long-term maturities: a deterioration in their perceived creditworthiness could shut them out of the market at precisely the wrong moment. And businesses with higher perceived risk typically find that lenders are simply unwilling to commit to long tenors, leaving short-term debt as the default option rather than a strategic choice.

4. Access to credit and banking relationships

Companies with solid banking relationships, a strong credit track record, and diversified funding sources can manage a higher proportion of short-term debt with lower risk. For businesses with more limited access, the stability of long-term financing carries significant value — even at a higher cost.

5. The stage of the business cycle

A business in expansion mode needs to commit to long-term financing in order to underpin its growth. A company in a mature or contracting phase can afford more short-term flexibility. The debt structure should be revisited every time the business plan changes in any material way.

Net working capital as a barometer of the balance

A practical way to assess whether the short-term/long-term balance is appropriate is to analyse net working capital: the difference between current assets and current liabilities.

Positive net working capital means that liquid short-term assets exceed short-term obligations: the business does not depend on external financing to operate day-to-day. Negative net working capital is not necessarily a problem — in some business models, such as large retail chains, it is structurally negative — but in most sectors it warrants careful analysis.

If net working capital deteriorates progressively, it is usually a symptom that the company is funding long-term assets or structural needs with short-term debt: an imbalance that, left uncorrected, leads to recurring cash flow stress.

Complementing this, the debt quality ratio — which measures what proportion of total liabilities matures within twelve months — provides a direct reading of the pressure the financing structure places on near-term cash flow. A high ratio is not inherently problematic, but it demands that the business have clear visibility over its refinancing capacity.

Weighted average maturity: a metric worth understanding

Beyond static ratios, financially sophisticated businesses actively manage their weighted average maturity (WAM): the average time to maturity across all financial liabilities, weighted by the size of each tranche relative to the total.

This metric is particularly useful for anticipating what is known as a maturity wall: the concentration of repayment obligations in a specific period — often the unintended consequence of successive short-term renewals without forward planning — which can generate severe refinancing stress if market conditions are unfavourable at that point. A business with 70% of its debt maturing in the same year is in a fundamentally different position from one that has deliberately laddered its maturities so that no single year accounts for more than 20% of the total.

This laddering — the deliberate distribution of maturities across multiple financial years — is one of the most consequential decisions a business can make in debt management. It requires no sophisticated instruments: what it requires is forward planning, with refinancing processes initiated well in advance and new debt tranches structured to fill the gaps in the existing maturity schedule.

Alternative financing as a lever for long-term debt

Traditional bank lending remains the backbone of financing for most mid-market companies, but the landscape has shifted considerably. Businesses that historically had no choice but to negotiate with their banking syndicate now have access to alternatives that warrant serious consideration.

On one hand, the Spanish Alternative Fixed Income Market (MARF) allows companies with a sufficiently established track record to issue debt at maturities beyond what banks typically offer, while also diversifying their creditor base and reducing reliance on a limited number of financial institutions. The bullet repayment structures common in these issuances — where principal is repaid in full at maturity — free up operating cash flow during the life of the instrument, which is particularly valuable for growth-stage businesses.

On the other hand, private debt funds and direct lending have gained significant ground in the mid-market segment. Their primary advantage over banks is not price — they are typically more expensive — but structural flexibility: bespoke amortisation profiles aligned with the business's cash generation, capital grace periods, or mechanisms that allow part of the financing cost to be deferred to maturity when the company needs to prioritise reinvestment. For acquisition finance or capital-intensive expansion projects, this flexibility can be decisive.

In both cases, the key is not to limit the search for financing to familiar interlocutors, but to design a structure that combines different sources and maturities according to the company's actual operational and strategic needs.

The most costly mistake: excessive dependence on short-term debt

In practice, many businesses reach financial difficulty not because their operating model is unviable, but because their debt structure is ill-suited to their asset base. The reliance on revolving credit facilities to fund permanent assets is one of the most recurring patterns observed in corporate restructuring processes.

The problem is compounded by the fact that short-term debt can appear cheaper at face value — lower headline interest rate — while concealing a higher true cost once refinancing risk, management effort, and the operational impact of tightening conditions are factored in.

Refinancing a credit facility in a restricted credit environment, or when the business is reporting weak results, can mean far more onerous terms — or simply the inability to renew. It is at that moment that many companies understand the cost of not having structured their financing properly when market access was favourable.

There is an additional risk that is frequently underestimated: maturity concentration. A company may appear to have a broadly reasonable short-term/long-term split and yet have accumulated renewals in such a way that a single year bears the weight of most of its obligations. When that year coincides with a credit tightening or a period of operational underperformance, the consequences can be severe.

When and how to review the short-term vs long-term mix debt structure

A financing structure is not something to be set once and left unchanged. It should be reviewed proactively at least at the following junctures:

• Before undertaking a significant investment: to ensure it is financed with the right instrument and maturity.
• When the strategic plan changes materially: an expansion, a disposal, or a business model shift alters cash flows and, with them, the optimal debt structure.
• When the interest rate environment shifts significantly: to assess whether it makes sense to refinance part of the debt or adjust the fixed/floating mix.
• When early signs of liquidity stress appear: do not wait until the problem becomes urgent.
• Well ahead of significant maturities: initiating a refinancing process twelve to eighteen months before a critical maturity fundamentally changes the company's negotiating position with lenders.

At Maraz Corporate Finance, we support businesses through this analysis — both financing in growth contexts and in restructuring situations — with the objective of designing financing structures that are sustainable and aligned with the company's medium and long-term objectives.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

FAQs on corporate short-term vs long-term debt structure

What proportion of short-term debt is appropriate for a mid-market company?

There is no universally correct figure, but as an indicative benchmark, a mid-market industrial or services business should be cautious if short-term financial debt exceeds 40–50% of total financial liabilities — and should in no circumstances use short-term facilities to fund fixed assets or projects with a payback period exceeding twelve months. The debt quality ratio — current liabilities divided by total liabilities — is the most direct indicator for monitoring this balance. If that ratio consistently exceeds 0.6, an in-depth review is warranted.

Is long-term debt always preferable?

Not necessarily. Long-term debt offers stability, but it comes at a higher cost and with less flexibility. For genuinely short-lived needs — financing inventory that turns over every two months, covering a temporary cash flow gap, or managing seasonal peaks — short-term facilities are the right instrument. The mistake is not using short-term debt per se, but using it to fund needs that are, by nature, permanent or long-returning.

How does a rising interest rate environment affect the short-term versus long-term decision?

In a rising rate environment, revolving credit lines and floating-rate debt become more expensive immediately, while fixed-rate long-term debt locked in before the increases becomes a comparative advantage. For this reason, when rates are low or the market is pricing in future increases, it is generally the most favourable moment to extend the weighted average maturity of the debt and lock in fixed rates. Waiting to refinance once rates have already risen is almost always more expensive.

What is a maturity wall and why is it dangerous?

A maturity wall is the concentration of repayment obligations in a specific period — often the unintended result of repeatedly renewing short-term credit lines without forward planning. The danger lies in the fact that when that period coincides with a restrictive credit environment or weak business performance, refinancing becomes very difficult or impossible on acceptable terms. The solution is deliberate maturity laddering: structuring debt so that no single year bears a disproportionate share of total maturities.

Does it make sense to access the MARF or private debt funds if we already have bank financing in place?

For many mid-market businesses, yes. Diversifying funding sources reduces dependence on a limited banking syndicate and can unlock access to maturities and structures that traditional banks do not offer. The MARF enables issuance of long-tenor debt with structures that free up operating cash flow. Private debt funds offer structural flexibility — grace periods, bespoke amortisation — that is particularly useful in acquisition finance or capital-intensive expansion. These are not mutually exclusive alternatives to bank debt: the most common approach is to combine them.

When should a company consider restructuring its debt?

Ideally, before the situation becomes urgent. Warning signs that should prompt a review include: sustained deterioration in net working capital, difficulty renewing facilities on customary terms, rising financing costs without a corresponding operational improvement, or a concentration of significant maturities within the next twelve months. Acting twelve to eighteen months before a critical maturity gives the business a fundamentally stronger negotiating position than doing so once the pressure is already visible to lenders.