2 min read
The matching principle
Sound business finance matches the tenor of a loan to the economic life of what it funds. Borrowing long to fund short-term working capital ties up a credit facility unnecessarily and may cost more over time. Borrowing short to fund a long-term asset creates rollover risk — at renewal the lending environment may have changed, rates may be higher, or the facility may not be available.
A commercial property purchased over 20 years with a rolling three-month facility is a classic mismatch that has caused business distress in periods of credit tightening. Equally, using a five-year term loan to bridge a 60-day debtor timing gap is inefficient and needlessly expensive.
When short-term borrowing is appropriate
Short-term facilities — up to 24 months — suit seasonal stock, a VAT or corporation tax bill that arrives ahead of expected revenue, a bridging situation pending a property sale, or a specific contract requiring upfront material costs to be covered before the client pays. The speed of arrangement is often a factor: unsecured short-term loans can be approved in 24–72 hours.
The trade-off is higher monthly repayments and, for very short terms, a higher effective cost. Always confirm total repayable, not just the monthly amount. See also VAT loans and bridging loans for specific short-term products.
When long-term borrowing is appropriate
Long-term facilities — typically three to twenty-five years — suit commercial property acquisition, large plant and machinery, leasehold improvements with a long remaining lease, and business acquisitions or management buyouts where the return on investment accrues over many years. Spreading the debt over a longer period reduces monthly cash outflow and improves short-term cashflow headroom.
- Commercial property → 10–25 years
- Plant and machinery → 3–7 years (matched to depreciation life)
- Business acquisition → 5–10 years
- Working capital → 3–24 months
- Bridging finance → 1–18 months
Long-term loans also give the company more time to generate returns from the investment before repayments absorb significant cashflow. The risk is that the business outlook changes during the term — early repayment charges should be understood before committing to a long-term facility.
Frequently asked questions
Are short-term loans more expensive than long-term loans?
On an annualised rate basis they can be, particularly for unsecured facilities. However, because they are outstanding for a shorter period, the total interest paid is often less than on a long-term loan. Compare on total cost of borrowing (total repayable minus advance) rather than rate alone.
What is rollover risk?
Rollover risk is the danger that when a short-term facility expires, you are unable to refinance on acceptable terms — because credit markets have tightened, the business's financial position has weakened, or the lender has changed its appetite. It is a particular risk when short-term borrowing is used to fund long-term assets.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.