Long-term debt is debt that has been accrued by a company and must be paid off in one year or more. These amounts can be found on the company’s balance sheet in the order they will need to be repaid. This is important information analysts look for on the balance sheet when determining how much leverage the company has and how flush with debt they are. To shed some light on how long-term debt works, consider this example.

Let’s say that Company A had to take out a loan for $5 million and must make a $50,000 payment to the bank every month over the next 10 years. The current liability would be $600,000 (12 months x $50,000 = $600,000), which would be due in one year. The remaining $4.4 million would be considered “long-term debt” because it would be due in over one year.

Now that you have a better grasp on what long-term debt means, knowing why it is an important aspect for any business is the next step.

Why Acquire Long-Term Debt?

Capital will immediately be incurred by the company acquiring this debt. The reason this is an important component for any company looking to borrow money from the bank is because by having this form of debt, businesses will be able to easily receive the funds needed to operate. One example is a start-up business that is fighting to get off the ground, but is having a difficult time getting the expenses needed, including insurance, license and permit fees, as well as equipment and supplies. Especially after the economic downturn in 2008, relying too much on long-term debt could have disastrous effects. Fortunately, firmer regulations have been created to keep businesses safe from an unstable economy.

The Pros and Cons to Long-Term Debt

Incurring long-term debt can be both beneficial and harmful to a company’s thriving future. Companies of all sizes will be able to invest into the resources needed to become a more profitable business by having a manageable amount of long-term debt. This is especially helpful for start-up who do not yet have the resources needed to leverage their business for success. However, obtaining too much of this debt could give the competitors an edge over your business because they will most likely have more cash in their bank account and have less debt. However, if your company has a low debt to equity ratio, this will prove to investors that the company is thriving and does not need to rely on debt to be successful.

By keeping an eye on the competition to know what their debt to equity ratio is and trying to pay it off quickly will make the company a strong competitor to invest in.

Where Long-Term Debt Can be Found

The following long-term liabilities are commonly found on balance sheets:

Financing Liabilities

• Convertible Bond: Debt that will allow bondholders to exchange their bonds for common shares.
• Notes payable: Debt received by a single investor.
• Bonds Payable: Debt sent to the general public or investors.

Operating Liabilities

• Post-retirement benefit obligations: Retirement benefits that can be payed through the pension plan.
• Capital lease obligations: Paying rent for the use of plants, equipment, or properties, while also holding some risk as if owning the property.
• Other incurred expenses: Deferred income tax or contingent obligations would be included here.