Short-Term Debt

Investment Dictionary -> Short-Term Debt

Short-Term debt is an account that stands for the current liabilities in the company’s balance sheet. Only debt that is due within a year will be quoted in the account. Normally, the short-term loans of companies are listed in the account. The value in this account is quite important while determining the financial situation of a company. A firm is thought to be in poor financial condition if the value in the account is larger than the cash equivalents of the company. A portion of the long-term debt which is due within the same period may also be included in the account.

The short-term loans are represented by operating term loans which are due in a one year period and lines of credit that revolve. These loans serve to finance the daily operations of the company such as the purchase of supplies and inventory, and the salaries of the employees.

Short-term loans are used to boost service, retail or manufacturing businesses in the acquisition of raw materials, inventory or parts and to promote or allow them to pay their monthly expenses such as interest and principal due loans, salaries, wages, leases, utilities, rentals, etc.

Such loans would not have been incurred if it was reasonable to sell the whole inventory and stock. This will bring cash immediately and prior to all payments that are due to the suppliers and employees. In most cases, however, this is not the case. The businesses are facing daily and monthly accruals of expenses such as rentals, wages, leases and so on, often incurred before the collection of revenue.

Typically, the credit unions and the non-commercial lenders offer this type of operating term loans. Often times, they are unable or unwilling to offer revolving lines of credit to their business clients. Lines of credit are usually granted to the most valuable clients of the lending institution.