What are liabilities in business?

Liabilities in business represent the portion of your company’s debts — amounts you owe to external parties such as suppliers, banks, or tax authorities. These obligations can be short or long term and are listed on the liabilities side of your balance sheet. Together with equity, they form the financial structure of your business.

Having a clear understanding of what liabilities in business are essential for maintaining control over your financial position and cash flow.

In this article, we explain what liabilities are in simple terms, how to identify them on your balance sheet, and the differences between short-term, long-term, and subordinated liabilities.

Table of contents:

1. What are liabilities in accounting?
2. Where do liabilities appear on the balance sheet?
3. What are subordinated liabilities?
4. Pros and cons of business liabilities
5. Manage your liabilities with Payt
6. Frequently asked questions about liabilities in business

What are liabilities in accounting?

In business finance, liabilities refer to the portion of funding that comes from third parties rather than the business owners. These are obligations that must be repaid within a specific period. Think of loans, outstanding supplier invoices, or tax debts.

You can calculate business liabilities using the formula: Liabilities = Total liabilities – Equity

This fundamental concept helps businesses understand what liabilities are in business and how they affect long-term stability.

What are current liabilities?

Current liabilities are debts with a maturity of less than one year. These obligations must be settled within the financial year. Examples include:

• Supplier invoices (creditors)
• Tax payments
• Short-term loans

Understanding what are current liabilities is crucial for liquidity management. If your short-term liabilities are high relative to your cash position, you may face payment difficulties. This is particularly important when assessing what are current and noncurrent liabilities in financial planning.

What are long-term liabilities in business

Long-term liabilities consist of obligations that extend beyond one year. These are typically used for financing larger investments. Examples include:

• Mortgage loans
• Long-term bank loans
• Lease payments

Long-term liabilities are essential for business growth, enabling investments in fixed assets such as property, plant and equipment. However, they also come with ongoing repayment commitments. A good understanding of what are liabilities in business includes recognising how long-term liabilities impact your balance sheet over time.

Where do liabilities appear on the balance sheet?

On the balance sheet, liabilities appear on the right-hand (liabilities) side. Here, you distinguish between short-term (current) and long-term (non-current) liabilities.

Example balance sheet:

This structure helps clarify what are liabilities in business and how they’re split into current and noncurrent liabilities.

What are subordinated liabilities?

Subordinated liabilities are a specific form of long-term liabilities. In the event of insolvency, these debts are repaid only after all other creditors have been settled. For this reason, subordinated liabilities are sometimes seen as a hybrid between debt and equity.

Examples include:

• Shareholder loans that are subordinated
• Conditional family investments

The advantage of subordinated liabilities is that they may enhance your solvency ratio, as other financiers often see them as lower risk. This nuance is important when exploring what liabilities are in business in depth.

Pros and cons of business liabilities

Every business must evaluate what liabilities are in business in the context of its risk appetite and financial goals.

How Payt helps you manage your liabilities

Properly managing your business liabilities starts with control over your financial processes. The faster your invoices are paid, the better you can meet your obligations and maintain healthy cash flow. Payt helps optimise this process.

With our software, you automate your credit management while keeping communication with your customers personal. As a result, invoices are paid on average 30–50% faster, and you save up to 80% of your time thanks to automated follow-up.

Want to see how Payt can support your business? Download our brochure or book a free demo.

Frequently asked questions about business liabilities