Advantages and Disadvantages of Debentures

Debentures is a type of debt which is issued by the company, the person who holds debentures receive regular interest and on maturity principal amount is repaid to debenture holders. Given below are some of the pros and cons of debentures –

Pros of Debentures

No Dilution of Ownership

One of the benefit of this source of finance is that when the company issues debentures it does not result in dilution of ownership as is the case with the issue of equity shares and therefore owners of company get funds without diluting the control of the company.

Tax Benefit

It also has the tax advantage because interest paid on debentures is a tax deductible expense and hence company gets the tax benefit which leads to more profits for the company because of lower tax payment.

No Voting Right

Since debenture holders do not have any voting rights they do not interfere with the working of the organization and hence does not create any obstacles in decision making process of the organization.

Fixed Rate of Interest

If the firm makes good profits during the year then unlike equity shares where you have to distribute that profit to the shareholders, debentures holders’ payment of interest is fixed and hence firm does not need to share profits with them.

Cons of Debentures

Payment of Interest is Mandatory

The biggest con of this source of finance is that payment of interest on debentures is mandatory and when company is making low profits or losses than these payments can lead to more strain on company’s balance sheet and nonpayment of interest can even lead to bankruptcy for the firm.

Future Borrowing

Another disadvantage is that debenture is considered as loans or borrowings and therefore the ability of the company to borrow further in case of need of funds reduces considerably.

Huge Fund Outlay on Maturity

Since on maturity they have to be repaid, company needs to plan properly and keep funds for the same because when they are repaid it involves substantial cash outflows and if company has not maintained enough funds it is a recipe for disaster.

Large Institutional Investors

Unlike equity shares which are bought even by small retail investors, debentures are bought by large institutional investors and hence at times it may prove to be costly and difficult source of finance for the company.

As one can see that debentures has pros as well as cons and hence any company before deciding whether to issue them or not must look at above points and introspect whether in the long term such issue is profitable for the company or not.

0 comments… add one

Leave a Comment


Related pages


nostro accountveblen goodswhat is unqualified audit reportdisadvantages of investing in stock marketexplain fifo methodwhat is the difference between direct and indirect laborwhat is promissory note and bill of exchangefinancial market segmentationmarket penetration advantages and disadvantagestypes of accounts real nominal personaldiscuss privatizationinferior goods economicsadvantages and disadvantages of borrowing money from a bankdifference between movable and immovable propertydisadvantages of absorption costingadvantages and disadvantages of financial leverageaccounting for sales returnsprovision for salary journal entrymerits and demerits of nationalizationadvantages and disadvantages of convertible bondsinternet demeritsdisadvantage of joint venturedemat account benefitscharacteristics of an oligopolybank loans advantages and disadvantagesthe difference between monopoly and oligopolybill discountingwhat is cost pull inflationmarginal costing systemsemi durable goods definitionwhat is indirect quotationthe balance in the prepaid rent accountdisadvantages of socialist economyskim strategyjob and process costingdifference between overdraft and term loanadvantages and disadvantages of inventorywhat is fund flow and cash flowwhen is the trial balance prepareddefine a mixed economysubvention definitionwhat is the full form of cpiintermediate goods economics definitionlaw of diminishing marginalffe reservehedgers in derivative marketexamples of inelastic goodscamels ratingmeaning of lafcapitalism and socialism differencesinelastic products examplesindirect and direct quotationsthe income and substitution effects of a price change explainperpetual successionbenefits of deflationmonopoly and oligopolytraditional economy definition exampleexamples of substitutes in economicsdifference between perfect competition and oligopolysingle seller monopolyfifo method definitionfifo disadvantagesadvantages and disadvantages of delegationborder fence pros and consfree market economy advantages and disadvantages pdfinternet banking disadvantagesdisadvantages of organisational structuredistinguish between trade discount and cash discountadvantages and disadvantages of capitalismdisadvantage of command economyvertical merger advantages and disadvantagessalary received journal entryconglomerate companiesdifference between accounts receivable and accounts payablefull form of cpidisadvantages of mergerscashless economydefine shareholdingproprietorship ratiodirect quote and indirect quote foreign exchange