Long Term Debt Flashcards, test questions and answers

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What is Long Term Debt?

Long-term debt is a form of credit taken out by businesses, individuals, and governments to finance capital investments or operations that span multiple years. A long-term debt obligation typically has a maturity date of more than one year and usually has an interest rate attached to it. This type of borrowing is often used to finance activities that generate income over the long term, such as construction projects, research and development initiatives, new equipment purchases, etc. Long-term debt can be secured by collateral or be unsecured. One advantage of taking on long-term debt is that it allows businesses to fund large projects without having to divert funds from other areas of the company’s operations. Additionally, for some projects there may not be enough cash in the short term for them to be undertaken at all; thus taking on long-term debt may give companies access to funds they otherwise could not have obtained. Moreover, unlike equity financing (e.g., issuing stock), when taking on long-term debt a company does not have to give up ownership control or any percentage of profits in order pay off the loan. However there are several risks associated with taking on too much long-term debt: an increased risk of default due to rising interest rates or decreased revenues; higher overall financial obligations if multiple loans are taken out simultaneously; difficulty refinancing existing loans under new terms; and adverse affects on credit ratings if payments are missed or late fees accumulate over time.