What are Short Term Notes Payable?

Short term notes payable are obligations to pay a specified sum, plus interest, within one year. These notes payable usually refer to the repayment of loaned funds in the near term. The concept can also apply to the payment of accounts payable that have been converted into short term notes payable, probably because the buyer was unable to pay within terms.

A business may elect to enter into a short term note arrangement when it believes that interest rates will decline in the future. If so, it wants to pay the current higher interest rate for the shortest period possible, and will then pay off the note and enter into a longer-term arrangement in the future, when interest rates are presumably lower. Alternatively, a lender may only allow a note's duration to be for less than a year when it is uncertain of the ability of the borrower to remain financially viable over the long term.

Short term notes can be negotiable. If so, the holder of such a note has the right to be paid the sum designated in the loan document, and sells this right by transferring the note to a third party in exchange for a payment.

Classification of Short Term Notes Payable

Short term notes payable are classified as current liabilities on a company's balance sheet, which can make the business look less liquid, since more obligations are coming due for payment in the short term. This line item appears in the following balance sheet exhibit.