Most businesses carry long-term and short-term debt, both of which are recorded as liabilities on a company's balance sheet. Business debt is typically categorized as operating versus financing. Operating liabilities are obligations that arise from ordinary business operations. Financing liabilities, by contrast, are obligations that result from actions on the part of a company to raise cash.
Long-term debt
Also known as long-term liabilities, long-term debt refers to any financial obligations that extend beyond a 12-month period, or beyond the current business year or operating cycle. Some common examples of long-term debt include:
- Bonds . These are generally issued to the general public and payable over the course of several years.
- Individual notes payable . These are debt instruments issued to individual investors. Payment terms might vary from note to note.
- Convertible bonds . These are bonds with a feature that allows holders to redeem them for shares of common stock.
- Lease obligations or contracts . Many business leases extend beyond a 12-month period, which is why they're often classified as long-term debt.
- Pension or postretirement benefits . Some companies offer long-term benefits to their employees or provide them with pension payments in retirement.
- Contingent obligations . These are potential obligations that may arise depending on how a future event plays out. A common example includes pending lawsuits that have not yet been settled.
Short-term debt
Also known as short-term liabilities, short-term debt refers to any financial obligations that are due within a 12-month period, or within the current business year or operating cycle. Some common examples of short-term debt include:
- Short-term bank loans . These loans often arise when a company sees an immediate need for operating cash. Short-term bank loans are due within a year.
- Accounts payable . This refers to money owed to suppliers or providers of services. A bakery's accounts payable might include invoices from flour and sugar suppliers, or bills from utility companies that provide water and electricity.
- Wages . These are payments due to employees.
- Lease payments . Though lease agreements are often categorized as long-term debt, payments that are due within the year are considered short-term debt.
- Income taxes payable . This refers to taxes due to the government that have not yet been paid.
What debt means for businesses
Ideally, a company's assets should exceed its liabilities. If the amount of a company's debt is greater than its assets, it could be a sign that the company is in bad financial shape and may have difficulty repaying what it owes.
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