Long Term Liabilities Definition

What are Long-Term Liabilities?

Long-term liabilities are any of the debts that the company has that will be due in more than a year from that balance sheet date. A company’s current portion of long-term debt is listed separately in order to provide a clearer picture of its current liquidity and the ability to pay its current liabilities. A long-term liability is also known as a long-term debt or a noncurrent liability.

Understanding Long-Term Liabilities

Long-term liabilities are a little more complicated than their short-term cousins. For one thing, all long-term liabilities (even personal ones) come with a current component, the part that must be paid within the next year. On the company’s balance sheet, the portion of long-term liabilities that will be paid within the next year gets shifted into current liabilities. Second, unlike standard current liabilities, long-term debt comes with interest attached, and that’s another liability on its own. 

In your personal financial situation, you may have dealt (or be dealing) with long-term debt, usually in the form of mortgages and car loans. Those liabilities come with fixed terms (usually 30 years for mortgages, typically five years for cars), spelled-out interest rates (either fixed or adjustable), and a schedule of payments that are due periodically over the life of the loan. 

It works pretty much the same for businesses, deviating somewhat in the case of things like long-term capital leases and bonds (which usually only show up on the balance sheets of larger companies).

Examples of Long-Term Liabilities

Big corporations have different kinds of long-term liabilities than small businesses. If you’re looking to invest in a major corporation, it’s important to know not only the types and amounts of these long-term liabilities but also their purposes. A corporate balance sheet might include:

Notes Payable to Officers or Shareholders: This comes into play when officers and shareholder-owners put money into the business without buying stock. When the notes (which are borrowing agreements, like formal IOUs) are paid back, the interest is tax-deductible to the company while dividends would not be. 

Bonds Payable: Sometimes corporations issue bonds (long-term debts sold to the public and used to finance things like expansions or acquisitions) to obtain financing rather than issuing more stock (which dilutes ownership). These bonds can be issued either to a specific group of investors or to the general public. 

Capital Lease Obligations: These are long-term lease agreements on major fixed assets, like production machinery or buildings. Though the related assets aren’t technically owned by the corporation, they show up in the fixed asset section of the balance sheet. 

Retirement Benefits Payable: If a corporation offers a pension plan, the money it’s expected to pay out to current and future retirees is a corporate liability. 

Contingent Liabilities: Contingent liabilities are possibilities rather than done deals, so they show up in the footnotes to the financial statements instead of on the balance sheet. They include things like unsettled lawsuits and warranties (promises to repair or replace defective products). For example, if a company sold a refrigerator with a two-year warranty, it would owe the possible expense of covering any necessary repairs or replacements until the two-year term expired. 

Notes payable and bonds payable are both financing debts, meaning they’re used to finance things like expansion plans and acquisitions (such as new factories or other companies), and they come with interest payable on top of the original principle balances. Capital lease obligations and retirement benefits payable are operating liabilities, meaning that they arise out of normal business activity. 

Total liabilities for a company offset its total assets, formalized in the accounting equation, to determine that company’s equity—what it’s really worth.

Why Do Investors Care About Long-Term Liabilities?

Long-term liabilities are an important tool for management analysis when using financial ratios. The current portion of long-term debt is segregated because it requires more liquid assets, such as cash, to cover it. Long-term debt can be repaid from various sources, e.g. from the company’s net income from its main business, from future investment income, or from cash generated by new credit agreements.

Debt ratios (also called solvency ratios) contrast liabilities and assets. Ratios can be modified to compare only total assets to long-term liabilities. This is called the ratio of long-term debt to assets. 

The ratio of long-term debt to total equity provides information about a company’s financing structure and financial leverage. Non-current liabilities in relation to current liabilities also provide information about the debt structure of a company.

How to Get a Long-Term Small Business Loan?

Like people, small businesses often take on long-term debt for mortgages and cars, but also for machinery and equipment. These are pretty standard, and they come with built-in collateral (the asset itself). But many hopeful small business owners need more, and they apply for business startup or expansion loans, in the hopes that a banker will take a chance on them. It can be very difficult to find that kind of financing, but luckily there’s a way to boost your chances: the SBA, or Small Business Administration. 

The SBA exists to help small businesses, and financing is one very big way they can offer guidance and assistance. With different programs for different situations, the SBA works with banks to help expand financing options for small business startups and expansions. 

The SBA may be able to help you even if you’ve already tried to get financing from the bank and didn’t qualify. If you meet all of their requirements, the SBA will guarantee at least part of the loan, making it easier for nervous lenders to take the leap of faith in your company.

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