debt financing means to borrow money or to arrange an investment from external sources. Companies on a large scale and organizations are not able to run all the affairs of their own capital so it is normal for them to take loans. The most common of this type of financing is an example of loans taken from the banks. The loan amount repaid on agreed premiums with interest at the rate specified
financial advantages of debt:
The following are the advantages of debt financing:
(i ) room for expansion: debt financing allows businesses to expand their operations. New branches can be opened in other cities and countries. You can adopt new lines of business to increase revenue. Easy access to credit encourages the entrepreneur to assume new risks and float new products. Business was also able to increase the size of its operations and raise the level of their products in a timely manner
(b) Research and development: debt financing allows the research and development process. Bank loans can be used to accelerate research and development activities. The potential gains for the company than when it is put up solid research on the market products. The new innovation, as well as increase the reputation of the companies, and also reduces the cost of production
(c) The high profit: due to business expansion and the use of new techniques of revenues and profits as the business grows. Huge returns means that there will be no room for further expansion in the works. It can also be used to pay higher bank lending profit. And thus increase the solvency of the work of
(d) ease of working capital: debt financing helps maintain appropriate working capital of the business. Room also provides for the payment of regular payments easily
(V) and revival of sick units: debt financing can be used to give breathing sick industrial units. Loans for the organization to be rescheduled and a new credit can be taken for these units so that they can begin production. In addition to providing financing, should also be given proper supervision and guidance. All this will rehabilitate the sick units and can help them to be successful and profitable unit
(v) Provision of insolvency: debt financing can be used to save the business from insolvency. In the case of any necessary amount of is to be made and there is no equity funds enough, then a loan can be taken to make payments and save the business from insolvency.
(vi) the tax advantage: are also asking this charge interest of net income before applying the tax rate, so this leads to a reduction of tax liabilities
financial shortcomings debt:
the following are disadvantages of debt financing:
(i) interest Payments: a very large amount of the net profits of the company must pay in interest expense on top borrowed money.
(b) Depression: if business came under depression and talked losses, and interest payments could become a big problem due to insufficient funds
(c) suit against the company: creditor claims may be brought against the business if the work fails to make the payments as agreed
(d) the seizure of collateral: If the business fails to pay interest on the amount of loan capital the bank can seize the collateral or mortgaged property
(V) risky investment: if the business is running on the capital a huge borrower, further investment in the business becomes risky. This danger does not encourage investors. Banks are reluctant to grant loans to such actions that are already under the burden of debt.
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