Entities use various forms of short-term and long-term debt in their capital structures. Common forms of short-term debt include short-term notes payable, commercial paper. Long-term debt may include long-term notes payable, debentures, bonds, and fiancé leases.

Shot-Term financing is generally classified as current and will mature within one year.

• Rates: Rates associated with short-term financing tend to be lower than long-term rates and presume greater liquidity on the part of the organization using short-term financing.

• Effect on Working Capital: Short-term financing is classified as a current liability and decreases working capital. The extent to which an organization uses short-term financing is dependent on both the amount of current assets it maintains and the risk tolerance of management. Shorter-term financing strategies require current asset levels to be sufficient to meet short-term obligations.

Advantages：

• Increased Profitability: Rapid conversion of operating cycle components (e.g. inventory, receivables) into cash in order to meet short-term obligations carries the potential of increased profitability (and improved liquidity).

  
  

• Decreased Financing Cost: Short-term interest rates are generally lower than long-term interest rates given the shorter duration of the financing instruments.

Disadvantages:

• 
  

• Increased interest Rate Risk: Interest rates may abruptly change, and given shorter maturities, may require greater financing charges than anticipated on future refinancing.

• Decreased Capital Availability: Lender evaluation of creditworthiness may change and thereby make financing impossible or less favorable by virtue of increased rates and/ or less favorable terms.

Long-term financing is generally classified as non-current and will mature after one year.

• Rates: Rates associated with long-term financing tend to be higher than short-term rates and presume less liquidity on the part of the organization using long-term financing.

• Effect on Working Capital: Long-term financing is classified as non-current and is not included in the calculation of working capital. However, dividend, interest, and principal repayments all require cash, which can reduce working capital over time. The extent to which an organization uses long-term financing is dependent on both the amount of current assets it maintains and the risk tolerance of management. Long-term financing increases financial leverage.

Advantages:

• Decreased Interest Rate Risk: For the borrower, long-term financing locks in an interest rate over a long period, thereby reducing the exposure to fluctuations in rates.

• Increased Capital Availability: Securing long-term debt guarantees financing over a long period and reduces the company's exposure to any risk that refinancing might be denied or modified with less favorable terms.

Disadvantages:

• Decreased Profitability: Higher financing costs reduce profitability.

• Increased Financing Costs: Long-term debt generally carries a higher interest rate given the longer duration of the financing instruments.

1.Interest Rate Risk: Lender's Perspective

For the lenders, a higher interest rate is charged for longer-term debt because the likelihood that interest rates will change over the period of the loan increases as the term of the loan increases. Higher financing charges compensate the lender for increased interest rate risk. Therefore, the lenders recognize their exposure to interest rate risk with long-term financing and charge a premium to the borrower in the form of higher rates.

2.Interest Rate Risk: Borrower's Perspective

The borrowers, on the other hand, lock themselves into a long-term interest rate to reduce their exposure to interest rate risk, and pay a premium to do so.

Considerations Under Current Policy Environment (2026)

• LPR at historic lows: 1-year LPR at 3.0%, over-5-year LPR at 3.5%. Long-term borrowing costs are relatively low, making it a favorable time to apply for long-term loans.

  
  

• Preferential mortgage rates: First-home loan rates can be as low as 2.8%-3.25%, offering excellent value for long-term mortgages.

  
  

• Short-term consumer loan rates: Approximately 3.5%-6.5%, showing no clear advantage over long-term loan rates. Cautious evaluation is advised.

Disclaimer: The above analysis is based on publicly available policy information and does not constitute specific investment advice. Investors should make decisions in light of their own financial situation, risk tolerance, and professional advisory opinions.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

Would you like to learn more about the business environment in China? Click the link and download our Practical Guides on Amazon! 

The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

• India FY 2026-27 Advance Tax: Schedule and Compliance Guide-PHC ADVISORY

• A Glance at the Vietnamese Economy: the Trade Perspective-PHC ADVISORY