Long term debt

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1. Long Term Debt By:- eFinanceManagement.com

2. Contents 1. Meaning 2. Types of long term d ebt 3. Advantages of l ong term d ebt 4. Disadvantages of long term d ebt 5. Long term d ebt on Balance sheet

3. Meaning Long Term Debt or LTD is a loan that is held beyond 12 months or more. In the  Balance Sheet , companies classify long term debt as a non-current liability. Such type of loans can have a maturity date of anywhere between 12 months to 30+ years. When the word "debt" is used to mean "liabilities" (as is done in financial ratios) then other examples will include vehicle loans, bonds payable, capital lease obligations, pension and other post-retirement benefit obligations, and deferred income taxes . Also known as long-term liabilities, long-term debt refers to any financial obligations that extend beyond a 12-month period, or beyond the current business year or operating cycle .

4. Types of Long term debt CONVERTIBLE BONDS :- These are bonds with a feature that allows holders to redeem them for shares of common stock. LEASE OBLIGATIONS OR CONTRACTS:- Many business leases extend beyond a 12-month period, which is why they're often classified as long-term debt. BANK DEBT :- Any loan that comes from a bank or any other financial institutions comes under bank debt. Unlike bonds, these loans are not tradable or transferable .

5. Continue… PENSION OR POSTRETIREMENT BENEFITS:- Some companies offer long-term benefits to their employees or provide them with pension payments in retirement. CONTINGENT OBLIGATIONS :- These are potential obligations that may arise depending on how a future event plays out. A common example includes pending lawsuits that have not yet been settled . NDIVIDUAL NOTES PAYABLE :- These are debt instruments issued to individual investors. Payment terms might vary from note to note.

6. Advantages of L ong Term Debt Every company needs funds to run its day-to-day business, buy fixed assets and for other business activities. Long term debts give the organization immediate access to funds without worrying for paying it in the short term. The borrower only has to make the payment of the current portion. In case, a company wants only a portion of total debt currently, they have the option to structure the debt that way. This way the company receives the debt as and when they need. Interest that the borrower pays on the debt is taken as expense in the income statement. Therefore, it helps to bring down the taxable income.

7. Continue… Debt financing provides sufficient flexibility in the financial/capital structure of the company. A business generates income and net worth for its owners. By using long-term debt, an owner leverages her personal investment to increase her returns.  Long-term debt usually has fixed interest rates that translate into consistent monthly payments and high predictability .

8. Disadvantages of Long Term Debt Too much of anything is bad and the same goes for the LTD. A company should not be overly dependent on the debts because one has to pay it eventually. Equity is a safer option for the reason that it is not mandatory for a company to pay dividends . However, if a company is issuing debt then interest payment is mandatory. Interest on debt is permanent burden to the company. . It is legally liable to pay interest on debt.

9. Long Term Debt on Balance Sheet The term ‘Liabilities’ in a company’s Balance sheet means a particular amount which a company owes to someone (individual, institutions or Companies). Or in other words, if a company borrows a certain amount or takes credit for Business Operations, then the company has the obligation to repay it within a stipulated time-frame .   If, a Company X ltd. borrows 5 million from a Bank with an interest rate of 5% per annum for 8 months, then the Debt would be treated as Short-term liabilities and if the tenure becomes more than one year then it would come under ‘Long-Term Liabilities’ on Balance Sheet.

10. Conclusion A company must always aim for the optimal debt structure. An organization should know their capacity, the growth target of the business every year and consider other aspects before bulking up the debt. Also, the company should be extra careful and ensure that the principal and interest amount do not impact the cash flow considerably . To know more about it click on the link below... https://efinancemanagement.com/sources-of-finance/long-term-debt

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