Long-term debt is any financial obligation a company is not required to repay within the next 12 months, or within its operating cycle if that cycle runs longer than a year. Corporate bonds, bank term loans, mortgages, and finance leases are the everyday examples. Where the debt sits on the balance sheet matters because obligations coming due soon draw on current cash, while long-term obligations reflect the company’s broader capital structure and how much leverage it is carrying.
The One-Year Rule That Decides Classification
Under U.S. generally accepted accounting principles, any liability scheduled to mature within one year of the balance sheet date, or within the operating cycle if that cycle is longer, is a current liability.1Deloitte Accounting Research Tool. Issuer’s Accounting for Debt – 13.3 General Everything else is non-current, which is the long-term category. Most businesses run on a cycle shorter than 12 months, so the one-year cutoff is what you’ll see in practice. Industries with naturally long production cycles, like distilleries or lumber companies, use their longer operating cycle instead.
Getting the split right changes what the balance sheet says about a company. Misclassify a short-term obligation as long-term and liquidity looks better than it is. Flip the error and long-term debt gets treated as current, making the company look like it’s running out of cash when it isn’t. Both mistakes distort the ratios that creditors and analysts rely on.
Common Forms of Long-Term Debt
Term Loans and Notes Payable
A term loan is the most straightforward form of long-term debt. A company borrows a lump sum from a bank or other lender and repays it in scheduled installments of principal and interest over a set period, often three to ten years. The loan agreement, sometimes called a promissory note, spells out the repayment schedule, the interest rate, and any collateral pledged. On the balance sheet, the loan is typically labeled “notes payable.”
Bonds Payable
Bonds let a company borrow directly from investors rather than from a bank. Each bond carries a face value (the amount repaid at maturity) and a coupon rate (the periodic interest, usually paid every six months). Bond maturities commonly range from five to thirty years. Because bonds trade on secondary markets, they open up a much larger pool of capital than a single bank relationship would.
Bonds fall into two broad categories based on collateral. A secured bond, such as a mortgage bond, is backed by specific assets. A debenture is unsecured and relies entirely on the issuer’s creditworthiness. Debentures carry higher risk for investors, so issuers with weaker credit generally have to offer higher coupon rates.
Convertible Bonds
A convertible bond starts as ordinary debt but gives the holder the option to swap it for a set number of the company’s common shares at a predetermined price. That exchange rate, the conversion ratio, is fixed at issuance. Investors get the upside if the stock climbs, so convertible bonds usually carry lower coupon rates than comparable non-convertible bonds. The trade-off for the issuer is cheaper interest today in exchange for potential dilution of existing shareholders later.
Mortgages Payable
A mortgage is a long-term loan secured by specific real property, such as a building, warehouse, or parcel of land. If the borrower defaults, the lender can seize and sell the collateral to recover what it’s owed. That security generally translates into lower interest rates than unsecured borrowing, because the lender’s downside is capped by the value of the property.
Finance Leases
Under the current accounting standard, ASC 842, certain leases are classified as finance leases when they effectively transfer the economic benefits and risks of ownership to the company using the asset.2Deloitte Accounting Research Tool. Roadmap to Leasing – 8.3 Lease Classification A lease qualifies as a finance lease if, for example, it transfers ownership by the end of the term, covers the major part of the asset’s economic life, or if the present value of the lease payments equals substantially all of the asset’s fair value.
When a lease meets any of those criteria, the company records a right-of-use asset and a corresponding lease liability, measured at the present value of the remaining lease payments.3PwC Viewpoint. 4.2 Initial Recognition and Measurement – Lessee The long-term portion of that liability sits in non-current liabilities alongside term loans and bonds. Legal title to the asset may stay with the lessor, but for accounting purposes the arrangement looks a lot like a financed purchase.
Fixed and Floating Interest Rates
Any of these instruments can carry either a fixed or floating interest rate. A fixed rate stays the same for the life of the debt, so interest costs are predictable. A floating rate resets periodically based on a benchmark. Since mid-2023, the dominant U.S. dollar benchmark has been the Secured Overnight Financing Rate, or SOFR, which replaced the now-defunct LIBOR.4Federal Reserve Bank of New York. Transition From LIBOR A floating-rate loan might be priced as “SOFR plus 2%,” meaning the rate moves with the overnight lending market. Floating-rate borrowers take on interest-rate risk but often start with a lower rate than a fixed-rate loan of the same maturity.
How Long-Term Debt Shows Up on the Balance Sheet
Long-term debt sits in the non-current liabilities section, below current liabilities. The reported figure is the outstanding principal balance that isn’t due within the next year. Interest expense flows through the income statement as a period cost and doesn’t appear as a balance sheet liability until it has accrued but not yet been paid.
The Current Portion of Long-Term Debt
As principal payments come due, accounting rules require the company to reclassify the amount owed within the next year out of non-current liabilities and into current liabilities.1Deloitte Accounting Research Tool. Issuer’s Accounting for Debt – 13.3 General That line item is called the current portion of long-term debt, often abbreviated CPLTD.
Here’s how it looks in practice. Suppose a company has a $1 million term loan and $100,000 of principal comes due within the next nine months. That $100,000 moves to current liabilities as CPLTD. The remaining $900,000 stays in non-current liabilities. Without this reclassification, the current ratio (current assets divided by current liabilities) would look artificially healthy, ignoring $100,000 the company actually has to pay soon.
The Refinancing Exception
There’s one important wrinkle. If long-term debt is scheduled to mature within the next year but the company intends to refinance on a long-term basis and can demonstrate the ability to do so, the debt can remain classified as non-current.5Deloitte Accounting Research Tool. Issuer’s Accounting for Debt – 13.7 Refinancing Arrangements The company proves the ability either by actually issuing new long-term debt or equity before the financial statements go out, or by having a binding financing agreement in place with readily determinable terms that doesn’t expire within a year and isn’t cancelable by the lender except for objectively measurable covenant violations.
This exception matters because many companies routinely roll maturing debt into new borrowings. Without the rule, a company that fully intends to refinance a $50 million bond maturing next quarter would have to show that $50 million as a current liability, temporarily wrecking its liquidity ratios even though cash isn’t really going out the door.
Covenants and the Compliance Risk Behind the Numbers
Nearly every long-term debt agreement includes covenants, which are contractual promises the borrower makes to the lender beyond simply repaying principal and interest. They come in two flavors. Affirmative covenants require the borrower to do certain things: maintain insurance, deliver audited financial statements on time, comply with applicable laws. Negative covenants restrict what the borrower can do, such as limiting additional borrowing, capping dividends, or blocking asset sales without lender approval.
Many agreements also include financial maintenance covenants that require the company to stay within specified ratios. A loan might require, for example, that total debt to earnings not exceed a certain level, or that interest coverage stay above a floor. High-yield bonds tend to use incurrence covenants instead, which are only tested when the company wants to take a specific action like issuing more debt, rather than on an ongoing quarterly basis.
Violating a covenant, even while making every scheduled payment on time, triggers what’s called a technical default. The consequences can snowball. The lender may have the right to demand immediate repayment of the entire outstanding balance, which is the nightmare scenario for a borrower without the cash to comply. Short of that, a breach can lead to a higher interest rate, a credit-rating downgrade, or forced renegotiation on less favorable terms.
From an accounting standpoint, a covenant violation can force the company to reclassify the entire debt balance as a current liability, since the lender now has the right to demand repayment at any time. The company can avoid this reclassification by obtaining a waiver from the lender before the financial statements are issued.6Deloitte Accounting Research Tool. Issuer’s Accounting for Debt – 13.5 Credit-Related Covenant Violations A track record of past waivers influences how realistic that option is. A problem in the loan agreement can bleed directly into the balance sheet and spook investors reading the financials.
Ratios for Judging Whether the Debt Load Is Manageable
Investors and creditors use several ratios to gauge whether a company’s long-term debt is manageable or heading into dangerous territory. No single metric tells the full story. Each answers a slightly different question, and they work best read together.
Debt-to-Equity Ratio
The debt-to-equity ratio divides total liabilities by total shareholders’ equity. A ratio of 1.5 means the company has $1.50 of debt-financed obligations for every $1.00 of equity. Some analysts narrow the numerator to only long-term debt, stripping out trade payables to focus on financing leverage. A persistently high ratio suggests heavy reliance on borrowed money, which amplifies both returns and risk. The right number varies widely by industry: a utility with stable, regulated cash flows can comfortably carry leverage that would alarm investors in a cyclical manufacturing business.
Debt Ratio
The debt ratio divides total liabilities by total assets. Where debt-to-equity compares debt to what shareholders own, the debt ratio shows what percentage of the company’s assets are financed by creditors of all types. A debt ratio of 0.60 means creditors have a claim on 60 cents of every dollar on the balance sheet. As this ratio climbs, the equity cushion protecting creditors in a downturn gets thinner.
Times Interest Earned
Also called the interest coverage ratio, this metric divides earnings before interest and taxes (EBIT) by total interest expense. It answers a simple question: how many times over could the company cover its interest payments from operating income? A ratio of 5.0 means the company earns five dollars of operating profit for every dollar of interest owed. Below 1.0, operating income doesn’t even cover interest, which is a red flag that the company may be burning cash to service its debt. Analysts generally look for a ratio of at least 2.5, though benchmarks differ by sector.
Long-Term Debt to Capitalization
This ratio divides long-term debt by total capitalization, which is the sum of long-term debt, preferred stock, and common equity. It isolates the long-term financing decision: of all the permanent capital the company has raised, how much came from borrowing versus selling ownership? A higher ratio signals more financial leverage and, by extension, more risk if earnings decline.
Restrictions on Paying Long-Term Debt Off Early
Retiring long-term debt ahead of schedule sounds like a purely positive move. It rarely is. Most corporate loan agreements include prepayment restrictions. The mildest version is a prepayment fee calculated as a small percentage of the outstanding principal, declining over the first few years of the loan. The harshest version prohibits prepayment entirely without the lender’s written consent. Bonds often include a “make-whole” provision requiring the issuer to compensate bondholders for the interest income they’ll lose if the bonds are retired early.
These restrictions exist because lenders priced the loan expecting a certain stream of interest income over the full term. If rates drop and the borrower refinances lower, the lender loses out. Prepayment terms are negotiated before the loan closes, so the time to push for flexibility is at origination, not once rates have moved in the borrower’s favor. A company weighing whether to refinance existing long-term debt has to compare the interest savings against prepayment penalties, new issuance costs, and the administrative work of renegotiating covenants with a new lender.