Short-term debt refers to financial obligations a company incurs that are due within a year. This type of debt is composed of loans, credit lines, or amounts owed to creditors that a company must settle promptly to maintain good standing and liquidity. Examples include a company's accounts payable or short-term bank borrowings, such as a working capital loan.
Short-term debts are typically recorded on the balance sheet under current liabilities. Companies manage these debts to avoid impacting their cash flow negatively and ensure their operations continue without interruptions. For example, a company might use a short-term loan from a bank to quickly acquire inventory that it intends to sell within a few months. Therefore, short-term debt is an integral part of corporate finance strategy to handle day-to-day operational requirements.