What Are Short-Term & Long-Term Business Debts Called?

Businesses frequently rely on various forms of debt to fund their operations, manage cash flow, and pursue growth opportunities. This financial leverage allows companies to acquire assets, invest in projects, and cover expenses without solely depending on immediate cash reserves. Understanding the different categories and names for business debt is important for assessing a company’s financial health and obligations.

Understanding Business Debt Classifications

Business debts are primarily categorized based on their repayment timeline. The main distinction lies between current liabilities, also known as short-term debts, and non-current liabilities, referred to as long-term debts. A debt is generally classified as current if it is due to be repaid within one year from the balance sheet date. Conversely, obligations with repayment terms extending beyond one year are considered long-term.

Beyond the time horizon, debts can also be distinguished by whether they are secured or unsecured. Secured debt means specific assets, such as property or equipment, are pledged as collateral, providing the lender with a claim on those assets in case of default. Unsecured debt, however, does not involve collateral and is issued based on the borrower’s creditworthiness and promise to repay.

Common Short-Term Business Debts

Short-term business debts are obligations that a company expects to settle within a year. These are typically used to manage immediate operational needs and working capital.

Accounts Payable represents money a business owes to its suppliers for goods or services purchased on credit. These are usually invoices that need to be paid within a short period, often 30 to 90 days.

Short-Term Loans are financial arrangements where the principal and interest are due within a year, sometimes up to 18 months. Businesses often use these loans for temporary funding needs, such as covering unexpected expenses or bridging cash flow gaps.

Lines of Credit provide businesses with flexible access to a predetermined amount of funds that can be drawn, repaid, and re-borrowed as needed. Interest is only charged on the amount actually borrowed, not the entire credit limit. This revolving nature makes them suitable for managing fluctuating cash flow, seasonal demands, or unforeseen costs.

Accrued Expenses are costs that a business has incurred but has not yet paid or received an invoice for by the end of an accounting period. Examples include accrued wages for employees who have worked but not yet been paid, or utilities that have been consumed but not yet billed. These liabilities are recorded to ensure that financial statements accurately reflect all expenses incurred.

Deferred Revenue, also known as unearned revenue, is money a company receives upfront for goods or services it has not yet delivered or performed. Until the product or service is provided, this advance payment is recorded as a liability because the company has an obligation to the customer. Once the obligation is fulfilled, the deferred revenue is recognized as earned revenue.

Common Long-Term Business Debts

Long-term business debts are financial obligations with repayment terms extending beyond one year, often many years into the future. These types of debts are typically used to finance significant investments, such as property, equipment, or business expansion. They provide a more stable and extended source of funding compared to short-term options.

Long-Term Loans, sometimes referred to as term loans, are typically repaid over periods ranging from three to 25 years. Businesses use these loans for larger, more substantial investments that require a longer repayment horizon, such as acquiring fixed assets or funding major projects. These loans usually involve a structured repayment schedule with monthly or quarterly installments covering both principal and interest.

Mortgages Payable represents debt secured by real estate, such as an office building or factory. The property itself serves as collateral for the loan, and these debts are commonly repaid over extended periods, often 15 to 30 years. While the majority is long-term, the portion of the principal due within the next 12 months is classified as a current liability.

Bonds Payable are a form of long-term debt issued by corporations and governments to raise capital from investors. When a company issues bonds, it promises to pay periodic interest payments and repay the principal amount at a specified future date, which can be many years away. Bonds are recorded as a liability on the balance sheet, reflecting the company’s obligation to the bondholders.

Capital Leases, also known as finance leases, are agreements that effectively transfer most of the risks and rewards of asset ownership to the lessee, even though the lessee may not hold legal title. For accounting purposes, these leases are treated as if the business purchased the asset and financed it through debt. This means both the leased asset and a corresponding liability are recorded on the company’s balance sheet.