Question

I need an up to date summary on long term debt of a business

Answer 1

In accounting, long-term debt generally refers to a company's loans and other liabilities that will notbecome due within one year of the balance sheet date. (The amount that will be due within one year is reported on the balance sheet as a current liability.)

To illustrate, let's assume that a company has a mortgage loan with a principal balance of $200,000 and 120 monthly payments remaining. The loan payments due in the next 12 months include $12,000 of principal payments. The $200,000 of debt should be reported on the company's balance sheet as follows:

• $188,000 as a long-term or noncurrent liability such as Noncurrent portion of mortgage loan
• $12,000 as a current liability such as Current portion of mortgage loan

If you use the word "debt" to be interchangeable with "liabilities" (as is done in financial ratios) then other examples will include vehicle loans, bonds payable, capital lease obligations, pension and other postretirement benefit obligations, and deferred income taxes.

Some long-term debt that will be due within one year can continue to be reported as a non current liability if the company intends to refinance it and can prove it will be done within 12 months without reducing its working capital.

Long-term debt is a sign of how much leverage a company is using to operate its business.

Effectively used, debt funds have advantages, but investors seldom see long-term debt as a benefit.

Financial Health Perception

One simple intangible benefit of having no or low long-term debt is simply the public perception that your company is in relatively good financial health, notes Spireframe Software in its "Long Term Debt" overview. Significant long-term debt is worrisome to potential investors in your company and can restrict your share price's upward mobility. Additionally, employees and other stakeholders in your company may have concerns about your company being overly leveraged.

Improved Flexibility

"Increased debt brings with it higher fixed costs that must be paid in good times and bad, and can severely limit a company's flexibility," reports the Encyclopedia of Business (2nd Ed.). Though low-cost debt can make for a good investment, companies with no long-term debt do not have to worry about paying off long-term debt when times are tough. During recessions or down times for a particular business, a tremendous advantage for companies is not having to make large principal and interest payments on debt.

Focused Management

Worrying about making regular long-term debt payments serves as a major distraction for company leaders. When company executives are not concerned with coming up with funds to make monthly or quarterly long-term debt payments, they have more time to focus on business operations, notes the Encyclopedia of Business. They also can find ways to invest capital in strengthening or growing the business.

Financial Freedom

Companies that do not currently have long-term debt have the capacity to acquire capital funds from investors or take on debt when necessary. Capital investors are more willing to invest in companies not heavily leveraged. Plus, when you do not possess high long-term debt, you have more ability to issue bonds or to acquire long-term loans.