Benefits & Disadvantages of Debt Financing

 The ability to raise capital for businesses is imperative as it allows them to expand and purchase assets to increase profits. Businesses mostly have two ways of raising funds.

  • Debt Financing
  • Equity Financing

Debt financing deals with borrowing money and repaying it with interest. It implies, when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay the principal and interest on the debt. The various advantages and disadvantages of raising capital through debt financing are the following:

Advantages

  • Maintain company ownership: The management has complete control over the decisions made on behalf of the company and of choosing the board members. The only obligation a debtor has to the lender is to pay back the principal and interest.
  • Tax deductions for interest paid: This is another advantage that companies receive. The internal revenue service considers the interest paid, a business expense, and allows businesses to deduct the payments from its corporate income taxes.
  • Greater freedom and flexibility: Businesses using debt financing to raise capital have more flexibility than those using equity financing as they are only obligated to the lenders for the repayment. After all this money is paid back, the businesses are free for the obligation.

Disadvantages

  • Repayment of Principal and Interest: A disadvantage of debt financing is that businesses are obligated to pay back the principal borrowed along with interest. The businesses suffering from cash flow problems may have a difficult time repaying the money.
  • Impacts on Credit Rating: Another disadvantage that debt financing has is that it affects the credit rating of a business. A company that has a significant amount of debt than equity financing is considered risky.
  • Cash on Hand Requirement: Companies seeking debt financing must meet the lender’s cash requirement, which means companies must have sufficient cash in hand.

Premier Debt Management is the best corporate debt management experts in New York, providing efficient and effective corporate debt management strategies for better growth tomorrow. They are the top corporate debt management company in New York, helping businesses handle their unsustainable debt with tailor-made debt management solutions. They provide top strategies for businesses, to survive today and grow tomorrow. Our mission is to provide superior and effective corporate debt management services at affordable prices. Contact them today so that they can get to work immediately for your better tomorrow.

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