Short-Term Debt

Short-term debt (current liabilities) is the total amount a company owes that must be paid within one year or within its operating cycle. On the balance sheet it appears under current liabilities and includes obligations arising from normal operations as well as short-term borrowings.

Key points

• Short-term debt must be paid within 12 months and is recorded as current liabilities.
• It includes both operating obligations (accounts payable, wages, taxes) and financing obligations that mature within one year (short-term bank loans, commercial paper).
• High short-term debt relative to cash or equity can indicate liquidity problems.
• The quick ratio is a common measure of short-term liquidity and creditworthiness.

How it works

Companies incur two broad types of liabilities:
* Financing debt — typically long-term borrowings taken to raise capital and usually listed after current liabilities.
* Operating debt — obligations that arise from day-to-day business activities and are expected to be settled within a year; these are the primary components of short-term debt.

When short-term liabilities exceed cash and cash equivalents, it suggests potential difficulty meeting near-term obligations. Lenders and credit analysts use liquidity metrics to assess this risk.

Measuring short-term liquidity

A widely used metric is the quick ratio:
Quick ratio = (Current assets − Inventory) / Current liabilities
A higher quick ratio indicates a stronger ability to cover short-term obligations without relying on inventory sales.

Common types of short-term debt

• Short-term bank loans — often used to cover immediate working capital needs; sometimes called a “bank plug” to bridge financing gaps.
• Accounts payable — amounts owed to suppliers or vendors for goods and services purchased on short-term credit (e.g., a 30-day invoice).
• Commercial paper — unsecured, short-term promissory notes issued by corporations to finance receivables, inventories, and payroll; maturities typically under 270 days and often issued at a discount.
• Wages and salaries payable — payroll obligations that are owed but not yet paid (e.g., wages earned before the next pay date).
• Short-term lease obligations — leases with remaining terms of one year or less (longer leases are usually long-term liabilities).
• Taxes payable — taxes due within the year, such as quarterly tax liabilities.

Why it matters

Short-term debt affects a company’s day-to-day liquidity and its ability to obtain financing. Creditors and investors monitor short-term liabilities relative to liquid assets and equity to evaluate financial health and default risk. Managing the composition and timing of short-term obligations is critical to maintaining solvency and operational continuity.