What is Short-Term Debt?

Short-term debt is the amount of a loan that is payable to the lender within one year. Other types of short-term debt include accounts payable, commercial paper, lines of credit, and lease obligations. The balance in the short-term debt account is a major consideration when evaluating the liquidity of a business.

Evaluating Short-Term Debt

To evaluate short-term debt, compare the current assets figure on the balance sheet to the current liabilities figure. Ideally, the current assets figure should be roughly twice the amount of the current liabilities figure. This implies that there is sufficient cash available, or assets that can be converted into cash, to pay an organization’s obligations as they come due. If the proportion of current assets to current liabilities is too low, it is possible that the business is facing a liquidity crises, and may not be able to pay its bills on time.

Presentation of Short-Term Debt

In the balance sheet, any short-term debt is classified as a short-term liability. All other debts with longer repayment periods are classified as long-term debt on the balance sheet, and so are positioned lower down in the presentation of liabilities.