{"id":13392,"date":"2023-01-17T19:20:00","date_gmt":"2023-01-17T19:20:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=13392"},"modified":"2023-01-18T22:06:21","modified_gmt":"2023-01-18T22:06:21","slug":"short-term-debt","status":"publish","type":"post","link":"https:\/\/businessyield.com\/finance-accounting\/short-term-debt\/","title":{"rendered":"SHORT TERM DEBT: Definition, Examples, and Debt financing","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
Analyzing a company’s debt position can be helpful in determining whether the company is using debt to drive business growth, which, in some cases, is beneficial for this company. Where danger may lurk<\/a> is when a company takes on more debt than it can handle. Therefore, measuring the company’s ability to meet its interest payments, or understanding when payments are due, can have a significant impact on the cash flow<\/a> of the business.<\/p>\n\n\n\n Current debts are obligations that must be paid within the next 12 months or a company’s current fiscal year. Short-term debts are also known as short-term liabilities. They can be seen in the liabilities section of a company’s balance sheet. Short-term debt is most commonly discussed in relation to business loan obligations, but it can also be applied in relation to personal financial obligations.<\/p>\n\n\n\n The first and most common type of short-term loan is a company’s short-term bank loan. These types of loans appear on a company’s balance sheet when the company is in need of quick funding to meet its working capital needs. It is also known as a “bank plug”, as a short-term loan is often used to bridge a gap between longer financing options.<\/p>\n\n\n\n Another common type of short-term debt is business debt. This liability account is used to keep track of all outstanding payments to third-party providers and interested parties. When a company purchases a machine for $ 10,000 in short-term credit payable within 30 days, the $ 10,000 is classified as a liability.<\/p>\n\n\n\n Commercial paper is unsecured short-term debt that is issued by a company and is generally used to fund accounts receivable and inventory and to cover short-term liabilities such as payroll. Its maturities are rarely extended by more than 270 days. Commercial papers are usually issued at a discount from face value and reflect current market interest rates. They are useful because these liabilities do not need to be registered with the SEC.<\/p>\n\n\n\n Depending on how employers pay their employees, wages and salaries can sometimes be viewed as short-term debt. For example, if an employee is paid on the 15th of the month for work done in the previous period, a short-term debt account is created for the wages owed until they are paid on the 15th.<\/p>\n\n\n\n Lease payments can sometimes also be recorded as current debt. Most leases are considered long-term debt, but there are leases that are expected to be repaid within a year. For example, if a company signs a six-month lease for office space, it is considered short-term debt.<\/p>\n\n\n\n Short-term debt can come in several forms. Some of the most common examples of short-term debt are:<\/p>\n\n\n\n Financial analysts often use a variety of financial metrics to examine a company’s debt liability and determine how financially sound the company is. Two commonly used metrics that focus on a company’s short-term debt obligations are the current metric and the working capital ratio.<\/p>\n\n\n\n The short-term ratio is calculated as the company’s short-term assets divided by its short-term liabilities. Indicates the company’s ability to meet its short-term debt obligations with relatively liquid resources.<\/p>\n\n\n\n A current rate of 1.0 indicates that the company’s cash and cash equivalents are roughly the same as its current liabilities. A ratio greater than 1.0 indicates that your short-term assets are more than sufficient to meet your current debt obligations.<\/p>\n\n\n\n The working capital ratio is the total of short-term assets minus short-term liabilities. Any positive number indicates that a company has capital in excess of what it needs to pay off its short-term debt.<\/p>\n\n\n\n Short-term debt financing generally applies to money that is required for day-to-day business operations, e.g., for the purchase of stocks, deliveries, or the payment of workers’ wages. Short-term debt financing is known as a business loan or a short-term loan because the scheduled repayment takes less than a year. A line of credit is an example of short-term loan financing. Lines of credit are often also secured by assets (or guarantees).<\/p>\n\n\n\n Short-term debt financing is often used by companies that tend to have temporary cash flow problems when revenues are insufficient to cover ongoing expenses. Startups are particularly prone to cash flow management problems.<\/p>\n\n\n\n Credit cards are a popular source of short-term finance for small businesses. In 2017, 59% of small business owners used credit cards to finance themselves, according to a study by the US National Small Business Association<\/p>\n\n\n\nShort Term Debt<\/span><\/h2>\n\n\n\n
Short-term debt is in contrast to long-term debt, which is debt obligations that have a term of more than 12 months in the future.<\/p>\n\n\n\nTypes of Short-Term Debt<\/span><\/h3>\n\n\n\n
Short Term Debt Examples<\/span><\/h2>\n\n\n\n
Read Also: DEBT SECURITIES (D.S): Definition, types with examples.<\/a><\/h5>\n\n\n\n
Assessing Company Debt<\/span><\/h2>\n\n\n\n
Short Term Debt Financing<\/span><\/h2>\n\n\n\n