Long-Term Debt

Investment Dictionary -> Long-Term Debt

Long-term debt refers to liabilities that last longer than a period of one year. They are also referred to as funded debt. The firms are obliged to disclose their long-term obligations on the balance sheet, including the corresponding interest rates and the date of maturity. The long- term debt differs from the company’s long term liabilities. The latter cover the supply of various services that may be paid already. The amount of long-term financial obligations on the balance sheet is essential. Decreasing debt over one or more years is a good sign of the company’s financial health. Firms with extensive amounts of debt may be overwhelmed by interest rates. Moreover, they will have insufficient amount of working capital for their daily operations. These factors may ultimately result in bankruptcy.

The debt typically consists of business loans, mortgages, notes and bonds with maturities over one year, and others. Debentures represent a form of bonds that are not secured by the company’s assets. However, they are accepted by the investors if the firm has a good credit standing or guarantees considerable earnings' rate. Mortgage bonds, on the other hand, are secured by some form of lien such as plant buildings and equipment. Securities such as T-bills are short-term debt because their maturities are shorter than the stated period.

Most lending institutions prefer log-term loans and unsecured loans due to the comparative predictability of their repayment rates. The majority of the lending institutions will conclude long-term debt agreements if the company’s assets and leverage are adequate. Long-term loan lenders include: the banks, trust and insurance companies, multiple loan specialists, as well as the pension funds. Typically, long periods of stable sales and profits facilitate the use of long-term financial obligations. Other factors in favor of long-term debt include: large profit margins, potential increase in profits, low price-earnings ratio with regard to the interest rates, and expected increase in the price levels.

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