Long Term Debt is a loan or a financial obligation that lasts more than 1 year.
Long term debt refers to money a company owes that it doesn't expect to pay off in the next year. It is usually accompanied by interest payments and in such case is called funded debt. Long term debt usually consists of things such as mortgages on corporate buildings, business loans for new factories, or other similarly large funding projects that require multiple years to pay off. Long term debt is recorded on a company's Balance sheet with its interest rate and date of maturity.
A company with too much long term debt will find itself overwhelmed with interest payments and at risk of having too little working capital, potentially leading to bankruptcy. One way of assessing whether a company has too much long term debt is by assessing its debt to equity ratio. A company that is reducing its long term debt displays signs of prosperity as its reducing its payments associated with the debt. A company that is increasing its long term debt is deteriorating as its increasing its interest payments and eventually risks becoming insolvent and going bankrupt.
Example
- Debt obligations such as bank loans, mortgage bonds, or debenture, which have maturities greater than one year, would be considered long-term debt.
- Company XYZ has a debt to equity ratio of 2.7 with $1 million in equity on its balance sheet. The company also has $2.7 million in long term debt on its balance sheet.
