Note payable and account payable: key differences for SMEs

Note payable and accounts payable are two concepts that are often confused by startups and small to medium-sized enterprises. However, they differ in terms of their operation and their roles within financial strategies. To effectively manage these two categories of payables, clear and detailed expenditure records are crucial; otherwise, it may impact their ability for strategic financing and even pose potential financial risks. This article provides a detailed introduction to the differences between accounts payable and notes payable, and how SMEs can leverage the bill payment features of quick payment accounts to manage their finances more efficiently and easily.

What is an account payable?

Accounts payable refers to the short-term liabilities that a company incurs after purchasing goods or services from suppliers, typically to be paid after receiving the goods or services. This amount usually needs to be paid within 30 or 60 days and is listed as a liability on the balance sheet. Accounts payable is an unavoidable financial responsibility in the daily operations of a business, and timely management and payment of these payables help maintain good relationships with suppliers and avoid default risks.

For example, a retail store selling hygiene products orders a batch of new masks from a factory. Both parties agree that the payment will be made to the mask manufacturer only after the goods are received. During this process, the hygiene product store will record this accounts payable on its books, indicating that they need to pay the relevant amount to the mask manufacturer. This amount typically needs to be paid within a specified period, such as 30 or 60 days.

What is note payable?

Notes payable refers to the long-term liabilities that a business incurs after borrowing funds from banks or other financial institutions. This typically involves signing a written promise that includes repayment terms, interest, and payment deadlines. This debt can be used for financing business expansion, purchasing equipment, etc., and has a clear repayment plan. Unlike accounts payable, notes payable often involve interest and longer repayment periods, becoming part of a company's long-term financial management.

For example, if the aforementioned hygiene products store wishes to expand its business by opening branches in various districts, it may need to raise a substantial amount of funds and cannot pay the full amount immediately. In this case, the hygiene products store can enter into a note payable agreement with a bank or lending institution, promising to repay a specific amount on a future date to secure the necessary funds for its expansion. This type of financing typically has clear repayment conditions and interest rates, requiring the payment of interest as a cost of borrowing. Unlike accounts payable, the payment process for notes payable is generally not restricted by specific transactions or suppliers, but rather depends on the company’s actual funding needs and financial strategy.

The difference between accounts payable and note payable

Many people may think that accounts payable and notes payable can be used interchangeably in definition, but that is not the case. The table below clearly summarizes the differences between the two:

What is a long term note payable?

As mentioned in the table above, a company's long-term notes payable (Long Term Note Payable, abbreviated as LTNP) refer to notes payable with a term of more than one year, which are part of the company's liabilities and primarily arise from long-term loans or financing arrangements.

For small and medium-sized enterprises (SMEs) that are profitable and can adhere to repayment terms, obtaining operational funds through long-term notes payable allows them to secure the necessary working capital and enjoy longer repayment periods (ranging from 12 to 30 months). This provides a flexible way to control capital expenditures and effectively achieve growth in the short term.

Consequences of not properly recording accounts payable and notes payable

If SMEs fail to properly record accounts payable and notes payable, it can lead to several negative consequences, including:

1. Difficulty in fund management
If a business does not accurately record its accounts payable and notes payable, it may struggle to control its cash flow, potentially leading to financial risks, such as being unable to pay suppliers on time, which can affect the company's operations and reputation.

2. Impact on account accuracy
A lack of proper records for accounts payable and notes payable can create confusion in the company’s accounts, thereby reducing the accuracy and reliability of financial statements, which impacts financial analysis and decision-making.

3. Potential default risks
Failing to accurately record payables can result in missed payments to suppliers, increasing the risk of default. This may negatively affect the relationship between the business and its suppliers, and the company may face legal actions or other legal issues.

4. Missed discount opportunities, leading to increased costs
Not recording payables in a timely manner may cause the company to miss opportunities for early payment discounts, meaning the business ends up paying more than necessary, which leads to increased costs.

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