Advantages and Disadvantages of Debentures

As we know debentures are the types of bonds that are not backed by assets so they come under the characteristics of debt as a result their advantages and disadvantages are somewhat similar to the debt. The advantages and disadvantages of debentures can be categorized as under:-

Advantages

Benefit of Tax

As issuing of a debenture results in an interest expense for the borrower so these instruments are considered to be tax free

Cheap source of Finance

As there no incurring of interest in long term financing such as debentures so they emerge as a cheap source of finance

No Dilution of Control

Issuing debentures does not dilute the control of the existing share holders or the investors of the issuing company.

No dilution in Profit

Issuing debentures don’t dilute the profit shares of the share holders or the equity holders of the issuing company.

Disadvantages of Debentures

Rigid Obligation

It is a legal obligation and the responsibility of the debenture holder to pay interest or the installment of the interest to debenture holders on time.

Enlarge Leverage Ratios

As debentures are source of debt financing they result in increasing the leverage ratios of the business with an increased chance of bankruptcy.

Restrictive Covenants

Due to the formation of the trust deal between the company and the trustee that can be a financial institution or the bank the company cannot take business decisions freely.

Other Related Accounting Articles:

• Types of Debentures
• Debentures
• Over leveraged
• What is a Financial Leverage?
• Leverage Buyout
• Underinvestment Problem
• Financial Gearing
• Earned Capital
• Sinking Fund
• Additional Collateral