Updated August 12, 2022

Advantage of Debt Financing in Business

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Advantage of Debt Financing in Business essay
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Debt financing is one of two methods through which companies can finance its assets. Equity is another method of financing one’s assets. Equity is more expensive as compared to debt and among these two sources of finance. Debt is a cheaper source of finance. Most companies prefer debt financing because of higher the rate of debt that much will be tax reducing. A debt can be defined a duty to pay money, deliver goods under an express agreement. One who owns is a debtor. Debt played a significant role in modern economies. All institutions including philanthropic organizations and government entities may rely on debt to fund operations in the short term and long term. Debt and equity are the two primary sources of financing that companies can turn to when looking to generate capital. Each has prone and cones.

Debt financing is the acquisitions of the loan whereas equity financing involves the sales of shares of stock in the company and exchange offends. A primary advantage of debt financing relative to equity financing is ownership retention. When the shares are sold it to raise funds, the turnover fractional ownership and voting rights in the company. With debt financing ownership is not lost and retains similar control on overall strategic decisions and business matters. Rising debt is less complicated to perform and monitor than selling shares. Debt financing at reasonable interest rate also makes for less expensive financing over time. As the rate of debt financing increases that much a company paid less amount of tax that’s why it is called as a tax deductible item. Several studies have been conducted in the examining influences of debt finance on the company performance. For instance different authors worked on debt financing in developed countries.

These authors are Khan, Khalid, Simon-oke, Afolabi, babatrunde (management department im sciences 2011) .They worked on different sectors like food and personal care industry, engineering sector, chemical sectors in Pakistan on debt financing. A research done in Nigeria on debt financing in the industrial side. All these authors discussed a positive relation between debt finance on company performance. They also mentioned that debt has a positive impact on the maintenance of ownerships of the owners. Fortunately, there are many researches done on debt financing in Pakistan as well as in foreign countries. In developed countries there is no organized structure of debt finance but, companies take debt finance for the improvement of their company performance as compared to foreign countries they have an organized structure of debt finance. There are some sectors in Pakistan where there is no work done on debt financing. In airlines sector there is not much work done on debt financing. This work will try to check the impact of debt financing in detail from the year 2007 to 2012.

Advantage of Debt Financing in Business essay

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What are some advantages and disadvantages of financing with debt?
Advantages of debt financing You won't give up business ownership. There are tax deductions. Debt can fuel growth. Debt financing can save a small business big money. Long-term debt can eliminate reliance on expensive debt. You must repay the lender (even if your business goes bust) High rates. It impacts your credit rating.
What are the advantages of debt financing over equity financing?
Advantages of debt financing Maintaining ownership – unlike equity financing, your business retains equity which means you continue to have complete control over your business. As the business owner, you do not have to answer to investors.
What are the advantages of financing?
What are the benefits of financing? Both consumers and businesses benefit from financing programs, because financing gives customers more buying power and flexibility, and it helps businesses boost sales and improve cash flow .
What is the advantage of debt finance Mcq?
3) Reduces WACC - The cost of debt is the interest rate applied on loans borrowed from bank and Non-banking financial institutions. A company can reduce its WACC by cutting debt financing costs.
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