Long-term financing
In one sentenceFunds the business obtains and repays over more than a year, such as medium- and long-term bank financing and capital increases, used to buy long-term assets.
Simply put
The golden rule: finance an asset over a term that suits its life. Equipment that works for ten years is not financed with financing repaid within months, or its installments will squeeze day-to-day cash.
The portion due within the next year appears under current liabilities, and the rest under long-term liabilities.
Worked example
A contracting establishment needs 600,000 SAR to buy equipment, and compares repaying the principal over 6 months or over 5 years.
Repayment over 6 months600,000 ÷ 6 = 100,000 SAR per month
Repayment over 60 months600,000 ÷ 60 = 10,000 SAR per month
Monthly principal with long-term financing10,000 SAR instead of 100,000
Formula: Financing principal ÷ number of months (before financing cost)
Don't confuse it with
Short-term loanIt is repaid within a year and suits financing inventory and working capital, not buying long-lived assets.