Looking for advantages and disadvantages of Long Term Debt?
We have collected some solid points that will help you understand the pros and cons of Long Term Debt in detail.
But first, let’s understand the topic:
What is Long Term Debt?
Long term debt is money that a company or person owes and must pay back after one year or more. It’s like a long-term loan used to buy big things like buildings or equipment.
What are the advantages and disadvantages of Long Term Debt
The followings are the advantages and disadvantages of Long Term Debt:
|Boosts immediate cash flow||Increases financial risk|
|Low interest rates typically||Interest payment obligation|
|Spreads out repayment over time||Reduces future borrowing capacity|
|Improves company’s credit rating||Can lead to bankruptcy|
|Allows for business expansion or investment||Dilutes company control|
Advantages of Long Term Debt
- Boosts immediate cash flow – Long term debt can immediately increase the amount of money a business has on hand, giving it more flexibility in its operations.
- Low interest rates typically – Often, this type of debt comes with lower interest rates, making it more affordable for businesses to borrow.
- Spreads out repayment over time – It also allows businesses to pay back what they owe over a longer period, reducing the financial strain on them.
- Improves company’s credit rating – By regularly paying off long term debt, a company can improve its credit rating, which can make future borrowing easier and cheaper.
- Allows for business expansion or investment – Finally, the extra funds from long term debt can be used to grow the business or invest in new opportunities, potentially increasing profits.
Disadvantages of Long Term Debt
- Increases financial risk – Long term debt boosts the financial risk as it implies a commitment to pay off the borrowed amount over a longer period.
- Interest payment obligation – The obligation to pay interest on the debt can strain company finances, especially if the business is not generating enough profits.
- Reduces future borrowing capacity – It can limit the company’s ability to borrow in the future, as lenders may see the existing debt as a sign of financial instability.
- Can lead to bankruptcy – If the company can’t meet its debt obligations, it might lead to bankruptcy, causing severe financial and reputational damage.
- Dilutes company control – The issuance of long term debt can dilute control over the company, as creditors may demand a say in company decisions in return for their financial risk.
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