Definition of Short Term Debt

Short-term debt is a term used in accounting and financial work to indicate debt with a particular time limit. Long-term debts take longer to pay off, which means the borrower has a longer period to amass the necessary funds for payment and the lender has a longer time to wait until fully payment of the loan has been completed. The shorter the term of the debt, the more quickly the money will be due.

Definition

In general, when people refer to short-term debt, they mean any debt that is fully due within a year. Some debts certainly do not qualify, like mortgages, which are stretched out over many years. But other types of debt, such as credit lines, are often due on a yearly or even monthly basis. Anything over a year may be called long-term debt, although long-term debt is more often associated with liabilities that will last several years, leaving a gray area.

Types

Individuals usually have only a few types of short-term debt, mostly credit cards or small loans used to buy personal assets. Businesses tends to deal in short-term debt more frequently. Many businesses borrower large amounts of many from banks in the short term to help with operation expenses. Other businesses issue short-term bonds, which create a liability when investors buy them. There are types of bonds that last only for a single day or a week, which banks use to store large amounts of cash by loaning it out at a low interest rate.

Analysis

Investors are especially interested in examining the short-term debt of business organizations. Short-term debt shows several important things about the financial state of a business. First, large short-term debts in comparison with short-term business income often means that the business is struggling financially and may be in trouble if revenue fall. A business with little short-term debt may be less risky to invest in but may also not be interested in expansion. Different industries expect different amounts of short-term debt.

Long Term Debt Relation

There are types of long-term debts that affect short-term debt calculations. A mortgage is a good example. While a mortgage can last up to 30 years, the lender requires mortgage payments monthly. These monthly payments count as short-term debt, because they are due monthly and are considered late if not paid on time. They would be calculated as part of the short-term debt of the borrower, but the entire loan amount would not.