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What Is Short Term Debt? – Advantages & Disadvantages

In this blog we will be discussing Short Term Debt, So you can get more knowledge about it and you can also share it with your friends. So first let’s know about the What Is Liabilities?

What Are Liabilities?

When we take a loan from any company or business for increasing our capital or if we take a loan of products from a supplier or creditor and that we have to return in a certain time is known as Liabilities.  

What Is Short Term Debt?

Short term debt is also known as current liabilities, In these liabilities, you have to pay your loan in one year, it is maintained in the current liabilities portion of the company’s balance sheet. If you don’t pay your loan in a year then it will be known as Non-current liabilities.

But you have to keep in mind that they will provide a smaller loan amount for short-term debt. Yes if you are looking for a larger amount then you should go with Non-current liabilities.

For Example– Suppose you have bought a mobile of 15000 from Flipkart and you have chosen a plan of EMI that you can pay 1000 per month, then you will pay full money in 15 months, which means you have chosen Long term debt ( Non-Current Liabilities).

On another hand, if you pay 1500 per month then you will pay full money in 10 months then it will be known as Short Term Debt ( Current Liabilities). So hope you have understood about Short Term Debt.

The common measure of this is a quick ratio that is known as integral in determining a company’s credit ratings that ultimately affect that company’s ability to procure financing.

Formula-

Quick ratio = (current assets – inventory) / current liabilities

Key Takeaways

  • It is also called Current Liabilities and this financial obligation has to be paid within one year.
  • common type short term debt includes short term bank loans, lease payments, accounts payable and income taxes etc.
  • The common measure of short term debt is the quick ratio that is known as integral in determining a company’s credit ratings.

Short Term Debt Examples –

  • Account Payable 
  • Short term loans
  • Commercial paper 
  • Lease Payment 
  • Taxes Dues 
  • Stock Dividends

Account Payable  

It includes money which a company has won through ordinary credits of purchases from suppliers, like- purchase products from wholesale to stock and it includes monthly bills and office rents too.

Short Term Loans

If any company is facing trouble collecting its own accounts receivable that can make it difficult to cover their accounts payable, then the company can take a short term loan from any bank such as a 90-day note due to being paid in three months.

Commercial paper

Suppose, the company does not want to take a loan from a bank then some companies decide to issue commercial papers which are unsecured promissory notes which typically come in 9 months or less than it.

Lease Payments

It is very common for any company to get a lease on the place of purchase, The payments which are on lease are dues within the next 12 months is a component of the company’s short term debt.

Taxes Dues

Tax components of any short term debt are included with any local, state or other types of taxes that a company may owe which are coming due to be paid within one year.

Stock Dividends 

If any company has declared that it will pay but not pay stock dividends to its shareholders then the dividend will be a part of the company’s short-term liquidity.

How Does It Work?

These works as a lifesaver when someone has an emergency to get money, For example- as we know the business can not get their money on a day-by-day basis because vendors or suppliers can make delays in paying money. Banks provide many short-term facilities to businesses for covering their everyday costs.

This loan comes in many different sizes and shapes. One can get short-term debts from suppliers, banks, and financial institutions. If borrowers have a need for a loan then they can apply online and also offline by visiting a branch. The lender will check the loan applicant’s creditworthiness, fulfil paperwork after discussing the terms of their banks, and they will release your money after approval.

Advantages Of Short Term Debt

There are many advantages that are declared below –

Short Time For Incurring Interest

As we know that in short-term debt we have to pay off within one year, so there will be low-interest payments as compared to long-term debt, the amount that you have to pay will be less.

Easier To Acquire 

Short term debts are a lifesaver for small businesses who suffer from less stell credit scores. The requirement of loans is easier to meet in part because loans are for small accounts as compared to amounts borrowed on long term debts.

Quick Funding Time 

These debts are less risky compared to long term debt because of a short maturity date. The borrower has the ability to repay the loan is likely to change over a short frame of time. So, the time that it takes for lender underwriting to process a loan is shorter. So, borrowing can get the funds quickly.

Fast Approval 

If you apply for short-term debt then you will be able to get fast approval without doing a lengthy process for approval as another loan. 

The disadvantage of Short term debt

The main disadvantage of short-term liabilities is we can get smaller amounts in the form of loans because of a short time like one year. So if you want to get a large amount as a loan then you have to go with Non-Current Liabilities or Long term debt.

Summary

I hope you have liked our post which was related to Short Term Debt and if you have any doubts related to it then comment below to let us know so that we can help you with the best answer.

 

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