What Is The Advantages And Disadvantages Of Debt Finance?

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.