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A long term debt can be defined typically as a debts which last for more than one year. It carries many types and features along with it. Long term debts can be classified into four types.
1. Secured Debt -- which includes Mortgage bonds, Collateral Trust Bonds, Equipment trust Certificates, and Conditional Sales Certificates, etc.
2. Unsecured Debt
3. Tax-Exempt Corporate Debt
4. Convertible Debt.
The Main features of the long term debt include Stated Maturity, Stated Principal Amount, Stated Coupon Rate of Interest, Mandatory Redemption Schedule, Optional Redemption Provision and Protective Covenants, to name a few.
"Debt" involves borrowing money to be repaid, plus interest. "Equity" involves raising money by selling interests in the company. Debt carries both advantages and disadvantages as against equity financing. The Advantages are the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company. A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth. Except in the case of variable rate loans, principal and interest obligations are known amounts which can be forecasted and planned for. Raising debt capital is less complicated because the company is not required to comply with state and federal securities laws and regulations. Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company.
As compared to the advantages listed above, there are also certain disadvantages. They are -- Unlike equity, debt must at some point be repaid. Interest is a fixed cost which raises the company's break-even point. High interest costs during difficult financial periods can increase the risk of insolvency. Companies that are too highly leveraged (that have large amounts of debt as compared to equity) often find it difficult to grow because of the high cost of servicing the debt. Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and non-core business opportunities. Also, The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry.
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