A:

Debt is separated into two categories:

1) Temporary or short-term
2) Permanent or long-term.

Temporary or short-term debt refers to debt with a maturity of less than one year. This means that the debt is due to be paid in less than one year. This could be a one-day limit a term of just a little less than 12 months. A company issues short-term debt if it is in immediate need of liquid cash and cannot

access it. Common examples of short-term debt are T-bills, loans and commercial paper. Permanent or long-term debt, by contrast, refers to debt that has a maturity period of 12 months or more. That means the company has over a year to pay back the debt. Common examples of long-term debt are loans, mortgages, and bonds.

Short-term debt often includes the smaller payments on long-term debt. Long-term debt payments a specific sum of money that is due monthly or at the end of a time period that is less than 12 months. The sum of money that is due monthly is included in short-term debt. For example, a company has $150,000 in long-term debt and $5,000 is due every three months. In its books, the company records the payments due within the next 12 months as short-term debt. (To learn more, check out Reading The Balance Sheet.)

As to why debt is issued in these two separate forms, short-term debt is meant to finance operations on a day-to-day level. For example, a company is in a seasonal business like selling lawnmowers may need short-term debt to cover payroll, leasing costs, materials and so on until its product or service begins to sell. The proceeds then go to paying the short-term debt down. Permanent or long-term debt is used to purchase assets that will take over a year, and more likely several years, to pay for themselves. The same lawnmower company would use long-term debt to finance the building of a larger factory, again paying it back over the years from increased profits due to increased production.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. Why would you look at a company's net debt rather than its gross debt?

    Learn the difference between net debt and gross debt, how to calculate debt using a company's financial statements and why ... Read Answer >>
  2. What is the difference between the debt ratio of a company and the debt ratio of ...

    Discover the different financial evaluation measures that are most commonly applied to individuals and corporations, respectively. Read Answer >>
  3. When should a business avoid debt financing?

    Read about the optimal use of debt in a business capital structure and how to know when a business should avoid further debt ... Read Answer >>
  4. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
  5. How long do typical debt management plans take to pay off debt?

    Find out more about how debt management plans are administered and what circumstances determine how long a management plan ... Read Answer >>
Related Articles
  1. Investing

    Understanding Long-Term Debt

    Long-term debt is any debt or liability that is due in more than one year.
  2. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  3. Investing

    What's Short-Term Debt?

    Short-term debt appears on the liabilities portion of a balance sheet. It’s usually comprised of short-term bank loans, including bridge loans and credit card charges. Short-term debt is one ...
  4. Financial Advisor

    The 4 Best Debt Reduction Services

    It can be tricky to find the best debt reduction services for your financial situation. These top 4 debt consolidation firms help make the process easier.
  5. Small Business

    Total Debt to Total Assets

    Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage.
  6. Investing

    Calculating Long-Term Debt to Total Assets Ratio

    A company’s long-term debt to total assets ratio shows the percentage of its assets that are financed with long-term debt.
  7. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    As people reach retirement they are carrying more debt than ever before. Why and what to watch for.
  8. Investing

    Explaining Debt Service

    Debt service is a measure of a person or entity’s use of cash to pay interest and principal on debt obligations.
  9. Investing

    What's Current Portion of Long-Term Debt?

    The current portion of long-term debt is the part of a company’s long-term debt that must be repaid within the next year.
  10. Investing

    Evaluating a Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
RELATED TERMS
  1. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  2. Short-Term Debt

    An account shown in the current liabilities portion of a company's ...
  3. Net Debt

    A metric that shows a company's overall debt situation by netting ...
  4. Funded Debt

    A company's debt, such as bonds, long-term notes payables or ...
  5. Cost of Debt

    The effective rate that a company pays on its current debt. This ...
  6. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
Hot Definitions
  1. Financial Statements

    Records that outline the financial activities of a business, an individual or any other entity. Financial statements are ...
  2. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  3. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  4. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  5. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  6. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
Trading Center