Article Side

Online Article Directory!

Hello Guest! Login or Register to submit articles!

Merits and Demerits of Debt Finance

By Arfan Ul Haq Subscribe to RSS | March 8th 2012 | Views:
loading
 
  



Debt financing means to borrow funds or to arrange for investments from external sources. Large scale businesses, organizations are not able to run all their affairs from their own capital so it is usual for them to take loans. The most prevalent example of this type of finance is the loans taken from banks. The amount of the loan is to be repaid in agreed installments along with interest at a specified rate.

Merits of Debt Finance:

Following are the merits of debt finance:

(i) Scope for Expansion: Debt financing allows business to expand its operations. New branches can be opened in other cities and countries. New lines of business can be adopted to increase revenues. The easy availability of credit encourages entrepreneur to take new risks and float new products. It also enables businessmen to increase the scale of their operations and to upgrade their products in time.

(ii) Research and Development: Debt financing allows the process of research and development. Loans taken from banks can be used to accelerate R & D activities. Earning potential of the company increases when the research hard products are floated in the market. The new innovation, besides increasing companies reputation, also reduces its cost of production.

(iii) High Profit: Due to expansion of business and use of new techniques the revenues and profits of the business also grow. Huge revenues means that there will be a room for further expansion of the business. Higher profit can also be used to repay the bank loans. Thus increasing the solvency of business.

(iv) Ease of Working Capital: Debt financing helps in maintaining adequate working capital of the business. It also provides a room for making regular payments easily.

(v) Revival of Sick Units: Debt financing may be used to give a breathe to the sick industrial units. The organization's loans can be rescheduled and new credit can be taken for such units so that they can start their production. Besides providing finance, proper supervision and guidance should also be given. All this will rehabilitate the sick units and can help them to be successful and profitable units.

(v) Saving from Insolvency: Debt financing may be used to save the business from insolvency. In case any essential payment is to be made and there are not enough equity funds then a loan can be taken to make payments and to save the business from insolvency.

(vi) Tax Advantage: As the interest charge is subtracted from net income before applying tax rate, so this leads to lower tax liability.

Demerits of Debt Finance:

Following are the demerits of debt financing:

(i) Interest Payments: Very huge amount out of net profit of the business have to be paid on account of interest on borrowed capital.

(ii) Depression: If a business comes under depression and losses occur, then the payments of interest could become a great problem due to inadequacy of funds.

(iii) Suit Against Business: Creditor can file suits against business if business fails to make payments as agreed.

(iv) Seizing of Collaterals: If the business fails to pay interest on capital amount of loan the bank could seize the collaterals or mortgaged property.

(v) Risky Investment: If a business is already running on the huge borrowed capital, further investment in a business becomes risky. This risk discourages investors. Banks also hesitate to grant loans to such business which are already under debt burden.

Arfan Ul Haq - About Author:
Arfa Ul Haq is an Asian author. He writes about economics articles,
principles of micro economics and harrod domar growth model.

Share on Facebook Tweet It Stumbleupon this post This post is delicious !

Article Source:
http://www.articleside.com/investing-articles/merits-and-demerits-of-debt-finance.htm

Related Investing Articles Subscribe to RSS

Outsourcing debt settlement is the best solution
Published by John Taylor on December 26th 2011 | Finance
If you are in the business of marketing debt resolution services, you should consider outsourcing de...
 
Blake cab offer some of the most reliable debt collection agency results of any business of its kind in the UK
Published by Mary Porter on July 12th 2012 | Finance
If you have incurred lost monies then here at Blake debt collection industry we have the experience ...
 
How to live free of debt in California
Published by Rajkumar Kaushal on May 15th 2012 | Finance
You must have seen debt settlement tips today or days back online. This is debt information for the ...
 
Cash Loans No Credit Check Canada: Alleviation of finance crisis
Published by Lily Jacobs on March 12th 2012 | Finance
Cash loans no credit check Canada are an ideal option available to the salaried people of Canada to ...
 
Bad credit debt consolidation UK
Published by Fresh Finance on January 19th 2012 | Finance
The debt consolidation entails taking out one mortgage to pay off many others. This is done to prote...
 
Loans from debt settlement banks
Published by Rajkumar Kaushal on May 30th 2012 | Finance
In the beginning Debt settlement IIc firms that take care of loans started with products that were f...
 
Profits of using TAXAS debt relief
Published by James Blee on February 14th 2012 | Finance
In economics language, Debt relief means to get relief from all the debts. Today, In USA debt relief...
 
Apply and avail the cash required by you with easy online finance
Published by Stevebavaro2011@gmail.com on March 9th 2012 | Finance
Online finance is the proper platform of getting funds when you are empty handed. So do not think mu...
 
Dumfries and Galloway debt figures reach record level
Published by Jack Gray on February 1st 2012 | Finance
A report by Citizens Advice Service was brought out a shocking number out of the people who are into...
 
Meet all small tasks with ease with short period online finance
Published by Sandra Jeux on March 1st 2012 | Finance
Now don’t bother about urgent cash you need at the time of emergency, apply online with easy short...
 
Resolution and reports on debt settlement
Published by Rajkumar Kaushal on April 30th 2012 | Finance
In the world of Debt Settlement report today, there are lots of programming from computer that is ta...
 
The best debt consolidation advice
Published by Fresh Finance on January 19th 2012 | Finance
Many cases of multiple charges, including credit card charges, economical credit score items from lo...
 
Bank debt settlement in America
Published by Govindsingh on June 26th 2012 | Finance
For you to get out of debt settlement bad during settlement of debt in bank is very important. Cashl...
 
Consider outsourcing your debt settlement business
Published by John Taylor on December 5th 2011 | Finance
If your business involves debt resolution services, the business may quickly spin out of control due...
 
Consultants for debt consolidation
Published by Rajkumar Kaushal on May 17th 2012 | Finance
Debt settlement has something to debt management for debtors. Debt consultants make the whole differ...
 
Credit card debt Relief- There is Hope of Relief Yet
Published by James Blee on December 22nd 2011 | Finance
Some people after receiving their credit cards do not know how to use them wisely. As they are easy ...
 
How to manage your debt
Published by Rajkumar Kaushal on June 23rd 2012 | Finance
Getting debt consolidation during settlement of debt is very important. Cashless policy where credit...
 
Faulty finance intended to increase values of homes
Published by Sli Dell on March 10th 2012 | Finance
After an allegation of faulty loans on UK banks created a serious problem for them. Specific allegat...
 
I am in a debt management plan and have been made redundant – what can I do?
Published by James Falla on November 28th 2011 | Finance
With the possibility of wages being reduced and jobs being lost as a result of the government cuts, ...
 
Simply what does debt elimination signify and how can debt management programs help you become free of debt?
Published by Deby Suportie on April 4th 2012 | Finance
Debt elimination is a service given by debt management plans to provide assistance to those who are ...