Reviewed by Aug 27, 2020| Updated on
What is a Long-Term Debt?
Any debt that has a repayment period of more than a year is known as long-term debt. There are two perspectives for long-term debts—financial statement reporting and financial investing.
The former perspective states that companies must report the long-term debts issued and all the related obligations on its financial statements. In contrast, investing in such debt includes investing money into debt investments with maturities of more than a year.
While debt owners see them as assets, issuers of debt consider them as a liability as they are to be repaid. Long-term debt liabilities act as a key component to determine business solvency ratio. Stakeholders and credit rating agencies analyse this ratio to assess the solvency risk of the company.
Understanding Long-Term Debt
Lenders issue long-term debts to companies with several terms and conditions, the primary factors being the repayment period and interest charges. Long-term debts attract investors as they can benefit from the interest payments, and they consider the maturity time as liquidity risk. However, the long-term debt obligation wholly depends on market-rate fluctuations whether the debt issued is based on a fixed or floating interest rate.
Why is it Popular Among Companies?
Companies choose long-term debts to obtain immediate capital to fund regular operations as well as new capital-intensive projects. While this is the case of mature businesses, even startups require funds to take-off and to pay for the basic expenses, such as licenses, research, insurance, equipment, supplies, and advertising.
Irrespective of the size of the company, capital is a crucial component of a business and debt is one of the sources to obtain the capital.
Interest paid towards debt obligations is considered as a business expense that may get tax deductions.
- Though long-term debts come with higher interest rates, the longer repayment period gives it an edge over short-term debts.