When considering whether to borrow debt on a long-term or short-term basis, there are several key factors to weigh:
- Interest rates - Long-term debt often carries lower interest rates than short-term debt. This makes long-term borrowing cheaper overall.
- Risk - Short-term debt carries less risk as the repayment period is quicker. With long-term debt, more can go wrong over an extended repayment timeline.
- Cash flow - Short-term debt places more pressure on near-term cash flows as the principal and interest must be repaid quicker. Long-term debt spreads repayments out over time.
- Flexibility - Short-term debt provides more flexibility to alter borrowing plans if needed. With long-term debt, you are locked in for the full tenure.
- Purpose - If borrowing for short-term needs like working capital, short-term debt would be more appropriate. If making a long-term capital investment, long-term debt aligns better with the asset life.
- Lender requirements - Lenders may impose restrictions or require collateral. This may dictate whether short or long-term borrowing is feasible.
Overall, if you can qualify for a long-term loan at favorable rates, and the debt aligns with the purpose and useful life of the capital needs, this provides cheaper financing over time. However, long-term debt reduces flexibility. Short-term debt is appropriate for temporary needs and offers more flexibility, but comes at a higher cost. Assess cash flows, risks, investment timelines and flexibility needs to determine the optimal debt tenure. A balanced mix of short and long-term borrowing is often prudent.