Floating debt is short-term debt that is constantly renewed to finance the capital needs of a company or institution. A business can use floating debt instead of long-term debt because of short-term loans that have lower interest rates. Also, if interest rates drop, the company will be able to refinance at a lower rate and reduce its expenses. The risk of floating debt is the possibility that interest rates will go up, increasing the company's expenses. On the other hand, the advantage of floating debt is that there is the possibility of benefiting from reductions in interest rates.
This type of short-term debt is of a temporary nature, which is restored after the possible temporary mismatches in payments and capital income that generated its issuance have elapsed. Floating debt is usually found between national or foreign banks and investors. Those obligations that were carried out in the short term put pressure on governments to issue new titles, thus producing a cycle of indebtedness, which, since there is no necessary income, leads to inflation due to the issuance of inorganic currency to a great extent.
Finally it can be said that since interest rates on long-term debt are often higher than interest rates on short-term debt, the company could be saving money on itself by financing short-term debt. term compared to long term loans. However, the downside is that the company could suffer if interest rates rise and they have to finance at a higher cost.
