What is long-term debt?
Long-term debt (LTD) funds major investments such as property, equipment, acquisitions or expansion. It sits under [non-current liabilities](/glossary/non-current-liabilities) on the [balance sheet](/glossary/balance-sheet).
Common types
- Bank term loans
- Commercial mortgages
- Bonds and notes
- [Hire purchase](/glossary/hire-purchase) and finance arrangements
- Lease liabilities under [lease accounting](/glossary/lease-accounting)
- Government-backed or development finance loans
Current portion of long-term debt
Each year, the part of the debt due within the next 12 months is reclassified as a current liability. This keeps liquidity ratios accurate.
Example
A business takes a $500,000 five-year loan repayable in equal annual instalments of $100,000 plus interest. At the end of year one, $100,000 is current and $300,000 is non-current (after the first repayment).
Key ratios
- Debt-to-equity = Total debt ÷ [Equity](/glossary/equity)
- Debt-to-EBITDA = Total debt ÷ [EBITDA](/glossary/ebitda)
- [Interest coverage ratio](/glossary/interest-coverage-ratio)
Benefits and risks
Debt is often cheaper than equity and interest is usually tax-deductible. But fixed repayments increase risk if revenue falls, and covenants may restrict how the business operates.