What Is The Advantages And Disadvantages Of Debt Finance?

Perhaps the best advantage of debt financing is that it allows the founders to maintain their ownership and control of the company. As opposed to equity financing, businesspeople will still be able to make key decision in the operation of their firm, as well as continue to reinvest more of the company’s profits into staying afloat.

Furthermore, debt financing provides mall firm owners with a better degree of freedom in terms of finance. Debt obligations will be limited to the loan repayment period 0, and after that the lender will have no more claims on the business. Equity financing involves equity investors claiming until their stock has been sold.

The biggest disadvantage, however, is that it will require a small business to continue making monthly payments, including the interest owed. Younger companies, too, will usually experiences bad cash flow that may make the regular payments rather difficult. Most of the lenders out there provide severe penalties for late and missed payments, making it a difficult decision for young companies and companies with bad cash flow to make.

Late penalties could be particularly problematic, as the loan company will generally have procedures in place to take possession of the original collateral at hand for when you do not pay, or will charge ever-increasing late fees to the business.

Another disadvantage is that is can often be difficult for unproven firms to obtain loans in the first place. Remember: Weigh up all the pros and cons before you make your decision. The future of the firm could rely on this decision!

The first advantage of debt financing is that ownership of the company is not shared and the founders of the company have greater control over the company. It also gives flexibility in decision making because of of financial freedom in the company. Debt financing gives a way to raise the funds from the creditors and once when the funds are repaid then the creditors do not have any claim over the company. Businesses can raise funds through debt financing and they can get as much fund as they need for the business. If a company is good in repaying it's debts then the credit rating of the company is improved and the chances for the company to go for debt financing in future also becomes more easier. Debt financing is less expensive and also easy to administer.

On the other hand, it has some disadvantages as well like it makes the businesses to pay the installment each month which increases the periodic expenses of the company. Sometime collateral is required for getting finances. Because of the interest rate fluctuations, cost of borrowing can increase. Failure of the company to meet its debt financing obligations can rate the company as poor credit company which makes future financing difficult. For small businesses there is always limited debt financing which can make the expansion plans for small businesses difficult to be achieved.