What is Short-Term Debt
Short-term debt is an account shown in the current liabilities portion of a company's balance sheet. This account is made up of any debt incurred by a company that is due within one year. The debt in this liabilities account is usually made up of short-term bank loans taken out by a company, or of commercial paper, among other types.
Short-term debt, also known as short-term or current liabilities, refers to any financial obligation that is either due within a 12-month period or due within the current fiscal year. The value of the short-term debt account is very important when determining a company's performance. If the account is larger than the company's cash and cash equivalents, this suggests that the company may be in poor financial health and does not have enough cash to pay off its short-term debts.
In addition to any short-term debts due within a year, there may be a portion of long-term debt that is also included in this account. This portion pertains to payments that must be made on any long-term debt throughout the year.
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BREAKING DOWN Short-Term Debt
Types of Short-Term Debt
The first, and often the most common, type of short-term debt is a company's short-term bank loans. These types of loans arise on a business's balance sheet when the company needs quick financing in order to fund working capital needs. It's also known as a "bank plug," because a short-term loan is often used to fill a gap between longer financing options.
Another common type of short-term debt is a company's accounts payable. This liabilities account is used to track all outstanding payments due to outside vendors and stakeholders. If a company purchases a piece of machinery for $10,000 on short-term credit, to be paid within 30 days, the $10,000 is categorized among accounts payable.
Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities such as payroll. Maturities on commercial paper rarely range longer than 270 days. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates, and is useful because these liabilities do not need to be registered with the SEC.
Sometimes, depending on the way in which employees are paid by their employers, salaries and wages may be considered short-term debt. If, for example, an employee is paid on the 15th of the month for work performed in the previous period, it would create a short-term debt account for the owed wages, until he or she is paid on the 15th.
Lease payments can also sometimes be booked as short-term debt. Most leases are considered long-term debt, but there sometimes are leases that are expected to be paid off within one year. If a company, for example, signs a six-month lease on an office space, it would be considered short-term debt.
Finally, taxes are sometimes categorized as short-term debt. If a company owes quarterly taxes that have yet to be paid, it could be considered a short-term liability and be categorized as short-term debt.