Advantages and Disadvantages of Debentures

Advantages of Debentures

Advantages of Debentures

Advantages of Debentures

Following are some of the Advantages of debentures.

1. Debenture are Preferred by Investors

Since they attract cautious investors by offering definite security and safety of investment, issue of debentures can raise more funds.

2. Debenture are Less Investment Risk

The interest on debentures is a charge against profits. The date and rate of payment are certain. So the investors can get interest whether the company makes a profit or not. The company is also benefited from the point of view of tax, as the interest is a charge against its profit.

3. Less Costly

Usually, the rate of interest is lower than the rate of dividend payable on preference shares and equity shares. So raising of capital through debentures is less costly.

4. Maintenance of Control

Debenture financing permits the company to raise long-term funds without diluting the present control.

5. Ability to trade on Equity

The company can trade on equity. In this way, equity shareholders are able to enhance their total earnings from the company.

6. Remedy against Over Capitalization

Whenever the company feels that it is over capitalized, it can redeem the redeemable debentures. This will help the company to overcome the defects of over capitalization.

7. Debenture are Reliable

The amount derived from debenture issue helps the company to implement expansion programmes. This helps the company not to depend on fair weather. sources like public deposits.

8. Market Response

The company can easily dispose of the debentures in the open market because debentures are having a satisfactory market response.

9. Useful for Conversion

The company may convert different loans into debentures carrying lower rate of interest.

Disadvantages of Debentures

Disadvantages of Debentures

Disadvantages of Debentures

Following are some of he disadvantages of debentures.

1. Debentures are not suitable for all Companies

It is not suitable for companies with fluctuating income and companies producing goods, which have an elastic demand.

2. Permanent Burden

Since the company has to pay interest whether it makes a profit or incurs loss, it becomes a permanent burden on the financial resources of the company.

3. Requires huge Fixed Assets

Most of the debentures are secured. So companies with less fixed assets cannot raise money through debentures.

4. No Voting Rights

The debenture holders have no voting rights. This may discourage some investors.

5. Difficulty in Repayment

During depression, the company will find it difficult to repay the principal and fixed interest.

6. Affecting the capacity to raise Loans

If debentures are issued, generally they are secured against all the assets. Because of this, the company may find it difficult to raise further loans and advances from banks, industrial financing institutions or from outsiders.

Summary

From the above discussion, we can summarize the advantages and disadvantages of debentures as follows.

Advantages of Debentures

  1. Debenture are Preferred by Investors,
  2. Debenture are Less Investment Risk,
  3. Less Costly,
  4. Maintenance of Control,
  5. Ability to trade on Equity,
  6. Remedy against Over Capitalization,
  7. Debenture are Reliable,
  8. Satisfactory market response,
  9. Useful for Conversion.

Disadvantages of Debentures

  1. Debentures are not suitable for all Companies,
  2. Permanent Burden,
  3. Requires huge Fixed Assets,
  4. No Voting Rights,
  5. Difficulty in Repayment,
  6. Affecting the capacity to raise Loans.

 

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