What Are The Advantages And Disadvantages Of Short-term Debt?

Merits and Demerits of Short-term Finance
Short-term loans help business concerns to meet their temporary
requirements of money. They do not create a heavy burden of interest on
the organisation. But sometimes organisations keep away from such loans
because of uncertainty and other reasons. Let us examine the merits and
demerits of short-term finance.
Merits of short-term finance
a) Economical : Finance for short-term purposes can be arranged at
a short notice and does not involve any cost of raising. The amount
of interest payable is also affordable. It is, thus, relatively more
economical to raise short-term finance.
B) Flexibility : Loans to meet short-term financial need can be raised
as and when required. These can be paid back if not required. This
provides flexibility.
C) No interference in management : The lenders of short-term
finance cannot interfere with the management of the borrowing
Sources of Short-term Finance :: 17
concern. The management retain their freedom in decision making.
D) May also serve long-term purposes : Generally business firms
keep on renewing short-term credit, e.g., cash credit is granted for
one year but it can be extended upto 3 years with annual review.
After three years it can be renewed. Thus, sources of short-term
finance may sometimes provide funds for long-term purposes.
Demerits of short-term finance
Short-term finance suffers from a few demerits which are listed below:
A) Fixed Burden : Like all borrowings interest has to be paid on
short-term loans irrespective of profit or loss earned by the
organisation. That is why business firms use short-term finance
only for temporary purposes.
B) Charge on assets : Generally short-term finance is raised on the
basis of security of moveable assets. In such a case the borrowing
concern cannot raise further loans against the security of these
assets nor can these be sold until the loan is cleared (repaid).
C) Difficulty of raising finance : When business firms suffer
intermittent losses of huge amount or market demand is declining
or industry is in recession, it loses its creditworthiness. In such
circumstances they find it difficult to borrow from banks or other
sources of short-term finance.
D) Uncertainty : In cases of crisis business firms always face the
uncertainty of securing funds from sources of short-term finance.
If the amount of finance required is large, it is also more uncertain
to get the finance.
E) Legal formalities : Sometimes certain legal formalities are to be
complied with for raising finance from short-term sources. If shares
are to be deposited as security, then transfer deed must be prepared.
Such formalities take lot of time and create lot of complications.

Short time debt can quickly turn into long time debt if there is no clear plan and no quick return on investment. It is a risk that has to be taken into consideration, and a backup plan would definitely help in case things don't turn out as expected.

Short term debt is generally considered to be liabilities that will come to be paid back within the next 12 months. For the same reason, companies use their short term assets to pay this short term debt back. For determining a company's Worth to invest in, the ratio of the short term assets to short term debt is a very commonly used benchmark. As a result, higher the short term debt, lower is this ratio which means the company has trouble with liquidity in short term - not a good place to invest.
On the other hand, short term debt, as the name suggests, gets off the balance sheets fast enough than longer term debt, meaning that companies with no long term debt and only short term debt can be said to be managing liabilities well, though it cannot be assumed that they will clear all of their short term debt.