Question

As a Financial Manager for a growing tech start up, evaluate three advantages and two disadvantages of choosing debt financing for your long-term capital needs.

Answer 1

Advantages of debentures from the company’s point of view:

1. The company’s control remains in the hands of its shareholders, even the profit-sharing ratio remains the same.
2. Debenture’s holders are paid off first, as it is treated as a liability to the business.
3. The use of debentures can encourage long-term funding to grow a business.
4. It is also cost-effective when compared with other forms of lending.

Disadvantages of debentures from the company’s point of view:

1. Interest payments are a financial burden on a company because it must pay the interest due to the debenture holders even if it faces monetary loss.
2. Issuing debentures assists a company in trading on equity. However, such debt instruments make it reliant on debt. Often, an imbalanced debt-equity ratio hampers a company's financial viability.
3. Redeeming debentures causes a huge cash outflow which may imbalance a company's liquidity.