Long term debt: Money borrowed by a company for more than one year is called long term debt. The reasons to issue long term debt could be either of the following:
- Funding long term assets: When the company has to setup factories and other infrastructure which has a certain cost and can’t be repaid in one year’s time from the yearly operations, the company borrows money for a longer term so that it can pay off the debt in small intervals (much like the house loans taken by individuals which they expect to pay off in coming years from the income).
- Funding acquisitions: When a company wants to buy out another company but doesn’t have enough capital to do it on its own, it borrows money from the market to acquire another company and pays off the debt in small steps using the cash flows from the business of existing operations and the acquired company.
- Leveraging the business for higher returns: It is important that we talk about the concept of leverage and how it can increase the returns for a business owner or even have a negative impact on the financial position. This concept applies to overall debt (short term debt + long term debt) and will be discussed in the chapter after we learn about Shareholders’ equity.
Other non-current liabilities are usually not significant to spend time on. These may relate to some taxes to be paid or other obligations.
Chapter 15: Shareholders’ equity