Understanding Long-Term Borrowings
In March 2025, India’s long-term external debt rose by $60.6 billion (₹5,30,977.20 crores), while short-term borrowings declined. Understanding long-term borrowings and their impact is essential for businesses seeking financial stability.
Key Takeaways
- Long-term borrowings provide capital for growth but require careful management.
- Common long-term borrowings include bonds, term loans, and mortgages.
- They affect liquidity, profitability, and key financial ratios.
- Timely repayment and managing interest costs are crucial for financial health.
- Companies should consider refinancing options to reduce borrowing costs.
What are Long-Term Borrowings?
Long-term borrowings (or long-term debt) refer to loans or financial obligations that a company must repay over a period exceeding one year. These funds are typically used to finance large projects, capital investments, or expansion plans.
Long-Term Debt (LTD) represents any outstanding debt with a maturity of 12 months or more, and it is recorded as a non-current liability on the company’s balance sheet.
Also Read: Short-Term vs Long-Term Loans: Benefits and Differences
Types of Long-Term Borrowings
Financial Implications of Long-Term Borrowings on a Company's Health
- Liquidity Impact: Regular debt payments reduce available cash flow.
- Increased Risk: High long-term debt raises financial risk, especially during economic decline.
- Higher Debt Costs: Servicing long-term debt can reduce profits.
- Credit Rating: Excessive debt can lower credit ratings, increasing borrowing costs.
- Leverage Ratios: High debt affects solvency and leverage ratios, raising investor concerns.
- Limited Flexibility: Long-term debt may restrict future investment options.
Managing Long-Term Debts of Companies
- Assess Debt Structure: Balance long-term and short-term debt to avoid cash flow strain.
- Refinance Debt: Consider refinancing options to reduce interest rates or extend repayment terms.
- Maintain Debt Conditions: Ensure compliance with debt conditions to avoid penalties or acceleration of payments.
- Prioritise Debt Repayment: Focus on high-interest debt first to minimize overall costs.
- Monitor Financial Health: Regularly track key financial ratios to ensure debt levels remain manageable.
Also Read: Guide to Understanding Debt Financing for Startups
How Recur Club Helps SMEs Access Long-Term Financing?
Recur Club simplifies access to long-term financing by connecting SMEs with tailored loan options. It helps businesses secure capital needed without the complexities of traditional lending.
We offer:
✔ 15+ credit structures to meet diverse financing needs
✔ Working capital solutions to keep operations running smoothly
✔ Secured and unsecured options tailored to your eligibility
✔ Expert capital advisory to guide the right debt structure
✔ Up to ₹100 Crore in capital for expansion or cash flow support
✔ 150+ lenders to secure competitive deals quickly
✔ Customised financing aligned with your revenue forecasts and cash cycles
Conclusion
Long-term debt offers businesses the capital to scale, but without proper management, it can lead to financial strain. Understanding the types of long-term debt and their impact allows businesses to make choices that support sustainable growth.
Recur Club simplifies the process by offering customised financing solutions to satisfy the unique needs of SMEs.
FAQ
Q: How can long-term debt impact a company’s profitability?
A: Long-term borrowings can reduce profitability due to interest expenses. However, if used for growth or investments, they may generate higher returns over time.
Q: What should businesses consider before taking on long-term debt?
A: Businesses should evaluate their cash flow, repayment capacity, and the purpose of the loan to ensure they can meet long-term obligations without financial strain.
Q: How do interest rates on long-term borrowings affect companies?
A: High-interest rates increase the cost of borrowing, reducing profitability. Companies need to assess whether the return on investment outweighs the borrowing cost.
Q: What are the key financial ratios impacted by long-term borrowings?
A: Key ratios such as debt-to-equity and interest coverage ratios are affected, which can influence investor confidence and credit ratings.
Q: How can companies manage long-term borrowings effectively?
A: Companies can manage long-term borrowings by refinancing to lower interest rates, ensuring timely payments, and balancing debt with equity.
