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. It sits in the non-current liabilities section of the balance sheet and typically includes corporate bonds, bank term loans, mortgages, and finance leases. The classification matters because obligations due soon draw on current cash, while long-term obligations reveal the company’s broader capital structure and appetite for leverage.
The One-Year Classification Rule
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 than a year, is classified as a current liability.1Deloitte Accounting Research Tool. Issuer’s Accounting for Debt – 13.3 General Everything else falls into the non-current (long-term) category. Most companies operate on cycles shorter than 12 months, so the one-year cutoff is the standard most readers will encounter. Industries with naturally long production cycles, like distilleries or lumber companies, use their longer operating cycle instead.
Getting the split right matters. If a company reports a short-term obligation as long-term, its liquidity looks better than it is. Flip the error the other way, and the balance sheet makes the company look like it is running out of cash when it isn’t. Either mistake distorts 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. A company borrows a lump sum from a bank 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 repaid at maturity and a coupon rate paid periodically, usually every six months. Maturities commonly range from five to thirty years. Because bonds trade on secondary markets, they open access to a much larger pool of capital than a single banking relationship.
Bonds fall into two broad categories by collateral. A secured bond, like 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 ratings typically pay higher coupon rates.
Convertible Bonds
A convertible bond starts as ordinary debt but gives the bondholder the option to exchange it for a set number of the company’s common shares at a predetermined price. That exchange rate, called the conversion ratio, is fixed when the bond is issued. Because investors get equity upside if the stock rises, convertibles usually carry lower coupon rates than comparable non-convertible bonds. The issuer trades cheaper interest today for potential dilution later.
Mortgages Payable
A mortgage is a long-term loan secured by real property such as a building, warehouse, or parcel of land. If the borrower defaults, the lender can seize and sell the collateral. That security generally translates to lower interest rates compared to unsecured borrowing.
Finance Leases
Under ASC 842, certain leases are classified as finance leases when they effectively transfer the economic benefits and risks of ownership to the lessee.2Deloitte Accounting Research Tool. Roadmap to Leasing – 8.3 Lease Classification A lease qualifies 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 one of these criteria, the company records a right-of-use asset and a corresponding lease liability on the balance sheet, 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.
Fixed-Rate and Floating-Rate Structures
Any of these instruments can carry either a fixed or floating rate. A fixed rate stays the same for the life of the debt, making interest costs predictable. A floating rate resets periodically against 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 loan might be priced as “SOFR plus 2%,” moving up and down with the overnight lending market. Floating-rate borrowers take on interest-rate risk but often start with a lower rate than they would get on a fixed-rate loan of the same maturity.
How Long-Term Debt Appears on the Balance Sheet
Long-term debt sits in non-current liabilities, below the current section. The reported figure represents the outstanding principal 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.
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 This line is called the current portion of long-term debt, often abbreviated CPLTD.
Here’s how that works in practice. Say a company has a $1 million term loan and $100,000 of principal is 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 would look artificially healthy because it would ignore money the company actually needs to pay soon.
The Refinancing Exception
One important wrinkle. If long-term debt is scheduled to mature within the next year but the company intends to refinance it on a long-term basis and can demonstrate the ability to do so, that debt can stay classified as non-current.5Deloitte Accounting Research Tool. Issuer’s Accounting for Debt – 13.7 Refinancing Arrangements The company proves its ability in one of two ways: 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 that permits the refinancing on readily determinable terms. The agreement can’t expire within a year and can’t be 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.
Debt Covenants and Compliance Risk
Nearly every long-term debt agreement comes with covenants, contractual promises the borrower makes to the lender beyond simply repaying principal and interest. Affirmative covenants require the borrower to do certain things, like maintain insurance, deliver audited financial statements on time, and comply with applicable laws. Negative covenants restrict what the borrower can do, such as limiting additional borrowing, capping dividends, or preventing asset sales without lender approval.
Many agreements also include financial maintenance covenants requiring the company to stay within specified ratios. A loan might require, for example, that the ratio of total debt to earnings not exceed a certain level, or that the interest coverage ratio stay above a floor. High-yield bonds tend to use incurrence covenants instead, which only get 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 a technical default. 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 on hand. Even short of that, a breach can lead to a higher interest rate, a credit rating downgrade, or renegotiated terms on less favorable footing.
A covenant violation can also 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 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 company’s track record of obtaining waivers influences how realistic that option is.
Key Ratios for Analyzing Long-Term Debt
Investors and creditors use several ratios to gauge whether a debt load is manageable or approaching 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 in debt-financed obligations for every $1.00 of equity. Some analysts narrow the numerator to include 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 wildly by industry: a utility company 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 tells you what percentage of 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 it owes. A ratio below 1.0 means operating income doesn’t even cover interest, 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 that the company could struggle to meet its obligations if earnings decline.
Prepayment and Early Repayment
Paying off long-term debt early sounds like a purely positive move, but it’s rarely that simple. Most corporate loan agreements include some form of prepayment restriction. The mildest is a prepayment fee calculated as a small percentage of the outstanding principal, declining over the first few years of the loan. The harshest 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 at a lower rate, 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 already moved in the borrower’s favor. Companies weighing a refinance need to compare the interest savings against any prepayment penalties, new issuance costs, and the administrative burden of renegotiating covenants with a new lender.
Tax Treatment of Debt Issuance Costs
When a company takes on long-term debt, it incurs upfront costs beyond the borrowed amount itself: legal fees, underwriting fees, registration costs, and similar transaction expenses. Federal tax rules require these debt issuance costs to be capitalized and deducted over the life of the debt rather than expensed all at once.7eCFR. 26 CFR 1.446-5 – Debt Issuance Costs The IRS treats these costs as if they reduced the issue price of the debt, effectively spreading the deduction using a constant-yield method tied to the loan’s interest rate. For a 10-year bond, that means the company deducts a portion of its issuance costs each year for a decade rather than taking the full write-off in year one.