Advantages and Disadvantages of Debentures

A debenture is a type of long-term debt issued by a company to the public to raise capital for various investments. It is usually used when the company has a solid financial position and does not want to dilute its ownership through the issuance of shares. Debentures is one of the methods of raising finance for a corporation. Like any other source of capital, debentures have several pros and cons.

Advantages of Debentures

There are certain advantages of issuing debentures:

  • Because of the fixed interest on debentures, companies with stable income can secure higher returns on equity capital by trading on equity.
  • The rate of interest is usually lower than the expected rate of return on share capital. This is because debenture holders do not bear any risk.
  • Debentures do not carry any voting right. Hence management by promoters or existing directors remains unaffected.

Disadvantages of Debentures

  • If the earnings of the company are uncertain or unpredictable, issue of debentures may pose serious problems for the company due to the fixed obligation to pay interest and repay the principle
  • The company is liable to pay interest even if there is no profit
  • If there is default in payment of interest or repayment of the principle, assets can be attached by order of the court
  • Trading companies which generally do not have large fixed assets cannot provide adequate security for issue of debentures.

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