Short-term debt is a financial obligation a company has that is due in the current accounting year. It is also known as current liabilities and short-term liabilities. Accountants use these terms interchangeably. These are shown in the balance sheets of a company under the current liabilities section.
Usually, a company has two types of short-term debts, they are:
- Financial debts: These are money lent to expand the business. Most financial debts are long-term, but the ones that mature within 12 months are listed under short-term financial debts. One example is short-term bank loans.
- Operating debts: These are money borrowed to fund a company’s primary operational costs within the current accounting year. These include accounts payable, salaries, rents, commercial papers, and stock dividends.
The current liabilities must be less than the cash to maintain the finances of the company. The higher the debt to equity ratio, the riskier it is for the shareholders.