The balance between short-term and long-term financing
Enabling attractive growth while building a long-term stable business requires a well-balanced financing structure. A central question is the balance between short-term and long-term financing
By: Gustav Linnarsson, Associate, TicWorks
Summary: A well-balanced financing structure strikes a balance between flexibility and stability. Short-term financing covers temporary liquidity needs, but over-reliance leads to constant refinancing. Long-term financing provides stability but can create concentration risk at maturity. Here, we walk through how to match financing to your business's assets and investment plan
Short-term financing – flexible, but requires refinancing
Short-term financing, such as overdraft facilities, is effective for temporary liquidity needs in day-to-day operations – for example during inventory build-up or seasonal fluctuations. It's often relatively quick to secure a smaller short-term credit when liquidity needs are urgent. At the same time, over-reliance on short-term credit can mean the business is constantly refinancing, making it difficult for management to lift their gaze and plan larger, long-term investments
Long-term financing – stability with concentration risk
Long-term financing creates stability and is well-suited to financing long-term assets such as real estate and production facilities. At the same time, this type of credit takes longer to close and can introduce concentration risk if a large share of the company's total financing matures on the same date. And if the company happens to be in an operationally weak position at the time of refinancing – following a major customer loss, for example – refinancing can become significantly more expensive due to increased credit risk
Match the financing to the business
The key is to match financing to the company's assets, day-to-day operations and investment plan. A well-designed financing structure provides support when temporary liquidity needs arise – and a stable foundation for future investments. Getting the mix right requires an understanding of both the company's business and the credit market's conditions – something we at TicWorks work with daily through our debt advisory
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