Here's what you need to know about the different types of debt companies may take on.
Most businesses carry long-term and short-term debt, both of which are recorded as liabilities on a company's balance sheet. (Your broker can help you find these. If you don't have a broker yet, head on over to our Broker Center, and we'll help you get started.) 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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FAQs
Financing debt is typically long-term debt since the amount of debt incurred is usually too large for a company to be able to reasonably repay in full within one year. Short-term debt more commonly consists of operating debt, incurred during a company's ordinary business operations.
What is short-term vs long-term debt examples? ›
Long-term liabilities or debt are those obligations on a company's books that are not due without the next 12 months. Loans for machinery, equipment, or land are examples of long-term liabilities, whereas rent, for example, is a short-term liability that must be paid within the year.
What is the difference between long-term and short-term in accounting? ›
Long-term assets have a long shelf-life, e.g., 10, 20, 50 years, etc. At the same time, short-term assets have a term of 1-2 years, up to 5 years. Therefore, one must refrain from converting long-term assets into cash as they are utilized for a few years. They are not used to satisfy short-term business needs.
What are the examples of long-term debt securities? ›
Long-term debt securities cover instruments such as bonds, debentures, and notes that usually give the holder the unconditional right to a fixed cash flow or contractually determined variable money income and have an original term to maturity of more than one year.
What are examples of short-term debt? ›
Some of the most common examples of short-term debt include short-term loans, wages due to employees, lease payments, current taxes due, and salaries.
Which option is a good example of a short-term debt? ›
Common types of short-term debt include short-term bank loans, accounts payable, wages, lease payments, and income taxes payable.
Which option is the best example of long-term debt? ›
The most common forms of long-term debt are bonds payable, long-term notes payable, mortgage payable, pension liabilities, and lease liabilities.
What is an example of a long-term debt to equity ratio? ›
Let's walk through an example. Company A has $2 million in short-term debt and $1 million in long-term debt. Company B has $1 million in short-term debt and $2 million in long-term debt. Both companies have $3 million in debt and $3.1 million in shareholder equity giving them both a debt to equity ratio of 1.03.
What is an example of long-term debt Why? ›
Types of Long Term Debt
Mortgages – These are loans that are backed by a specific piece of real estate, such as land and buildings. Bonds – These are publicly tradable securities issued by a corporation with a maturity of longer than a year.
What are five examples of long-term liabilities? ›
Here are several examples of long-term liabilities that you may see on your balance sheet:
- Long-term loans.
- Bonds payable.
- Post-retirement healthcare liabilities.
- Pension liabilities.
- Deferred compensation.
- Deferred revenues.
The length of time in which the loan is due dictates whether it's recorded as a short or long -term liability. Short- term liabilities are those due within 12 months and long- term are due in more than 12 months.
Which is not an example of long-term debt? ›
The option credit card debt is not an example of long term debt. While a mortgage, car loan, and student loan are all examples of long term debt because they are borrowed for longer periods of time, credit card debt is typically considered short term debt.
What is considered long-term debt? ›
Long-term debt is debt that matures in more than one year and is often treated differently from short-term debt. For an issuer, long-term debt is a liability that must be repaid while owners of debt (e.g., bonds) account for them as assets.
What is the most common type of long-term debt? ›
Any debt that will take more than one year to pay back is considered long-term debt. The most common types of long-term debt or liabilities include bank debt, mortgages, bonds, and debentures.
What is an example of current portion of long-term debt? ›
For example, if a company owes a total of $100,000, and $20,000 of it is due and must be paid off in the current year, it records $80,000 as long-term debt and $20,000 as CPLTD.
What are the long-term debts? ›
Long-term liabilities, also called long-term debts, are debts a company owes third-party creditors that are payable beyond 12 months. This distinguishes them from current liabilities, which a company must pay within 12 months. On the balance sheet, long-term liabilities appear along with current liabilities.
What are three long-term debts? ›
It is classified as a non-current liability on the company's balance sheet. The time to maturity for LTD can range anywhere from 12 months to 30+ years and the types of debt can include bonds, mortgages, bank loans, debentures, etc. This guide will discuss the significance of LTD for financial analysts.
