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What are the Advantages of Debt Financing?

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When a Firm borrows money to be paid back in future with interest is called debt financing. It could be a secured as well as an unsecured loan. There are quite a few advantages of debt financing and can help improve the credit score in the long run. The interest rates on Business Loans are usually much lower than the cost of equity. One can also avail tax deductions on the interest paid and hence it gives the debtor tax shields. Debt holders do not have voting rights in the business or in the day to day operations mostly and hence there is no loss of control. They need to be paid a fixed rate from the company accounts and there have no claim on the profits.

Due to these factors, the cash outflow is also fixed and hence the expenses are quite predictable. There are also fewer formalities while raising debts as opposed to compared to raising equity. The equity shareholders need to meet once a year at least as ordained by law, but there is no such requirement of debt holders. One needs to take into account certain factors like Current leverage, which is the debt-equity ratio, Interest coverage ratio, Company credit rating, Future predicted cash flows, Earnings consistency, Purpose of business funding and Duration of funds requirement.