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Short-Term Debt vs Long-Term Debt: What's the Difference?

When it comes to borrowing money, businesses have a few different options to choose from. They can take out a loan, use a credit card, or borrow from shareholders. Each of these has different terms and conditions attached. In this article, we're going to focus on the difference between two types of debt that businesses often use: short-term debt and long-term debt.

What is Short-Term Debt?

Short-term debt is any debt that is due within one year. This could be a business loan that needs to be repaid in six months, a line of credit that must be repaid in three months, or even a credit card bill that is due next month. Short-term debt is often used to finance day-to-day operations or to cover unexpected expenses. Because the repayment period is so short, businesses typically have to make regular payments (usually monthly) to repay the debt. Interest rates on short-term debt are usually higher than on long-term debt, because lenders view it as a higher risk.

What is Long-Term Debt?

Long-term debt is any debt that is due after one year. This could be a business loan that needs to be repaid in five years, a line of credit that must be repaid in seven years, or even a mortgage that must be repaid over the course of 15 or 30 years. Long-term debt is often used to finance major purchases or expansion projects. Because the repayment period is so long, businesses typically make regular payments (usually monthly or quarterly) to repay the debt. Interest rates on long-term debt are usually lower than on short-term debt, because lenders view it as a lower risk.

The Difference Between Short-Term and Long-Term Debt

The main difference between short-term and long-term debt is the repayment period. Short-term debt is any debt that is due within one year, while long-term debt is any debt that is due after one year. This repayment period can have a big impact on the interest rate that you'll pay. Short-term debt typically has a higher interest rate than long-term debt, because it's seen as a higher risk by lenders.

When to Use Short-Term Debt

Short-term debt is often used to finance day-to-day operations or to cover unexpected expenses. Because the repayment period is so short, businesses typically have to make regular payments (usually monthly) to repay the debt. If you need money for a short-term project or expense, short-term debt may be a good option. Just be aware that the interest rates will be higher than on long-term debt.

When to Use Long-Term Debt

Long-term debt is often used to finance major purchases or expansion projects. Because the repayment period is so long, businesses typically make regular payments (usually monthly or quarterly) to repay the debt. If you need money for a long-term project or expense, long-term debt may be a good option. Just be aware that the interest rates will be lower than on short-term debt.

The Bottom Line

Short-term debt and long-term debt are two options that businesses have for borrowing money. The main difference between the two is the repayment period. Short-term debt is any debt that is due within one year, while long-term debt is any debt that is due after one year. Interest rates on short-term debt are typically higher than on long-term debt, because it's seen as a higher risk by lenders. When deciding which type of debt to use, businesses should consider the repayment period and the interest rate.

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