Long-Term Debt

What Is Long-Term Debt?

Long-term debt is borrowing that does not have to be repaid within the next twelve months. On a balance sheet, it is usually listed under liabilities below current liabilities, since those obligations come due sooner. Common forms include bonds, term loans from banks, mortgages, and long-term lease obligations. Unlike short-term borrowing, which is often used to cover day-to-day needs, long-term debt is generally used to fund larger commitments that pay off over many years.

How It Works

A borrower receives cash today and agrees to repay the principal over a set period, usually paying interest along the way. Many bonds pay periodic interest and return the principal at maturity. Other long-term loans are repaid in regular installments that combine interest and principal. When part of the debt comes due within the next year, that portion is reclassified as a current liability, so the long-term figure shrinks as time passes.

Companies borrow this way to finance multi-year projects, such as building a factory or acquiring another business, without using all of their cash in a single payment. For example, a company might issue a ten-year bond to pay for new equipment and repay it gradually over the life of that equipment.

Why It Matters to Investors

Investors often review long-term debt alongside cash, equity, and earnings to judge how much financial risk a company carries. A company with heavy debt must make interest payments regardless of how business is going, which can strain cash flow during a downturn. Analysts often compare long-term debt to equity using the debt-to-equity ratio. Borrowed money can boost returns when it earns more than it costs, but it magnifies losses when it does not.