What Is Short-Term Debt?

What Is Short-Term Debt?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Short-term debt, often referred to as current liabilities, is money that a company owes and must pay within one year. It’s typically used for day-to-day operations such as purchasing inventory, paying staff wages, or covering unexpected business expenses. Short-term debts can come in various forms, for instance, bank loans, accounts payable, or accrued liabilities.

Related Questions

1. What are examples of short-term debts?

Some common examples of short-term debts include bills payable, bank loans, accounts payable, lease payments, salaries payable, dividend payable, tax payable and other operational expenses that are due within a year.

2. How is short-term debt managed?

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Short-term debt is typically managed by ensuring that the company has sufficient cash flow to cover these obligations. This can include careful budgeting, timely collections of accounts receivable, and strategic timing of expenses.

3. What happens if a company cannot pay its short-term debt?

If a company cannot pay its short-term debt, it may face serious consequences such as legal action from creditors, a decrease in its credit rating, or, in severe cases, insolvency or bankruptcy.

4. What’s the difference between short-term and long-term debt?

While both types of debt involve money that a company owes, the difference lies in the payback period. Short-term debt is typically due within a year, whereas long-term debt is money that the company owes and needs to pay back over a longer period, often several years.

5. Why do companies use short-term debt?

Companies use short-term debt to cover operational expenses and other immediate costs associated with running the business. It also allows companies to seize business opportunities quickly without having to dip into their longer-term funds or assets.