Short-term to long-term: repairing a mismatched balance sheet
When a growing company funds long-term assets with short-term credit, the warning signs appear in its bank account long before its profit and loss.
One of the most common problems we see in otherwise healthy companies is not too much debt, but debt of the wrong shape. A business expands — a new machine, a second location, a larger inventory base that never unwinds — and funds it from the cash credit account because that money is available immediately. For a while nothing appears wrong.
How the mismatch shows up
Short-term limits are sized for the working capital cycle. When they are used for long-term purposes, the account stops revolving: the balance stays near or above the limit because the money is sitting in fixed assets rather than in receivables that will be collected.
Under the Reserve Bank's Prudential Framework for Resolution of Stressed Assets, a cash credit or overdraft account whose outstanding balance remains continuously above the sanctioned limit or drawing power for thirty-one to sixty days is classified as SMA-1, and for sixty-one to ninety days as SMA-2. Those classifications are reported to credit bureaus — and, for larger borrowers, to the Reserve Bank's central repository — and are visible to every future lender.
The balance sheet tells the same story: a current ratio drifting below the level on which the working capital limit was assessed, and a rising share of current liabilities funding non-current assets.
The repair
The remedy is to convert the portion of short-term borrowing that has become permanent into structured long-term finance: a term loan or working capital term loan with a repayment schedule matched to the cash the underlying assets actually generate. That restores headroom in the cash credit limit, normalises the account's conduct, and replaces renewal risk with a predictable repayment profile.
Lenders will size the conversion around debt service coverage — the ratio of cash available for debt service to principal and interest due. Most look for a comfortable margin above one, and the conservative case matters more than the base case.
Timing is everything
A conversion negotiated while accounts are regular is a restructuring of choice. The same request made after an account has slipped into SMA-2 is a very different conversation, with fewer lenders willing to have it. The best time to fix the shape of a balance sheet is the quarter someone first notices it is wrong.
This article is general information about the financing landscape, current as of its publication date. It is not financial, legal or tax advice; regulations change, and every company’s position is different.
