diff --git a/.changeset/chatty-cobras-cheer.md b/.changeset/chatty-cobras-cheer.md
new file mode 100644
index 0000000000..c8203e58c0
--- /dev/null
+++ b/.changeset/chatty-cobras-cheer.md
@@ -0,0 +1,5 @@
+---
+'@backstage/config-loader': patch
+---
+
+Correctly resolve config targets into absolute paths
diff --git a/packages/config-loader/src/sources/ConfigSources.test.ts b/packages/config-loader/src/sources/ConfigSources.test.ts
index 43feb3ca27..f095bbec42 100644
--- a/packages/config-loader/src/sources/ConfigSources.test.ts
+++ b/packages/config-loader/src/sources/ConfigSources.test.ts
@@ -95,6 +95,14 @@ describe('ConfigSources', () => {
       ),
     ).toEqual([{ name: 'FileConfigSource', path: '/config.yaml' }]);
 
+    expect(
+      mergeSources(
+        ConfigSources.defaultForTargets({
+          targets: [{ type: 'path', target: 'config.yaml' }],
+        }),
+      ),
+    ).toEqual([{ name: 'FileConfigSource', path: resolvePath('config.yaml') }]);
+
     const subFunc = async () => undefined;
     expect(
       mergeSources(
@@ -172,8 +180,8 @@ describe('ConfigSources', () => {
         }),
       ),
     ).toEqual([
-      { name: 'FileConfigSource', path: 'a.yaml' },
-      { name: 'FileConfigSource', path: 'b.yaml' },
+      { name: 'FileConfigSource', path: resolvePath('a.yaml') },
+      { name: 'FileConfigSource', path: resolvePath('b.yaml') },
       { name: 'EnvConfigSource', env: { HOME: '/' } },
     ]);
   });
diff --git a/packages/config-loader/src/sources/ConfigSources.ts b/packages/config-loader/src/sources/ConfigSources.ts
index 43123f87ea..03fc6d83d6 100644
--- a/packages/config-loader/src/sources/ConfigSources.ts
+++ b/packages/config-loader/src/sources/ConfigSources.ts
@@ -161,7 +161,7 @@ export class ConfigSources {
       }
       return FileConfigSource.create({
         watch: options.watch,
-        path: arg.target,
+        path: resolvePath(arg.target),
         substitutionFunc: options.substitutionFunc,
       });
     });