Long-term liabilities are financial obligations or debts a business is not expected to repay within one year.
Primary Implication
If your Long-term Liabilities are higher than your Fixed Assets after Depreciation, you owe more than your core assets are worth.
Either get your assets to earn you higher profits so you can pay down your debt or sell off underutilized assets to free up cash to pay down your Long-term Liabilities. For most businesses in this situation, doing both is the best approach.
Overview
The Potential Downside of Long-Term Financing
What are Long-Term Liabilities?
Long-term liabilities are debts or financial obligations that your business needs to pay off over a period longer than one year. Think of things like loans, mortgages, and bonds.
The Challenges of Long-Term Debt
While long-term debt can be useful for funding growth, it also comes with potential downsides:
- Reduced Cash Flow: Higher debt levels mean higher monthly payments, leaving less cash available for other investments or emergencies.
- Limited Flexibility: Debt can restrict your ability to pursue new opportunities or weather unexpected challenges.
- Risk of Collateral Loss: If you use assets as collateral and can’t make your payments, you could lose those assets.
Personal Guarantees: A Serious Risk
Be especially cautious about long-term debt that requires a personal guarantee. This means you’re personally liable for the debt if your business can’t pay. Creditors can go after your personal assets (like your house or savings) to recover the money.
Think Carefully Before You Borrow
Before taking on long-term debt, especially with a personal guarantee, make absolutely sure that:
- The investment will generate enough profit to cover the debt payments.
- Your business is financially stable enough to handle the added financial burden.
