Introduction
The background readings of this Module provides plenty of information regarding both the issue of the capital structure decision and the concept of the weighted average cost of capital. Dr. Biger has provided a substantial amount of background information and reading material for this module. Much of the information is complex, but it’s necessary for a working knowledge of corporate finance.
Advantages and Disadvantages of Debt Financing
Debt financing is an approach of investing that involves borrowing money from a lender with the understanding that the full amount will be repaid in the future, with interest. So it is just a simple loan of money with the intent to be paid back at a future date. The cost of borrowing the money or “debt financing” is paid in interest. The more equity that a company has, the better chances that the lender will charge a lower rate of interest. A new business will more then likely have a higher rate of return than a well established business. (Debt Financing, 2008)
Some advantages of using debt financing is if you have a good credit history you can pay a lower interest rate to receive a loan. Companies that are in good standing, debt financing allows them to retain ownership and control of the company. For small business it can be an advantage because once they pay off the loan, what they used the money for, it now solely theirs. Paying on the debt in a timely manner can enhance the credit rating and make it easier to obtain future financing. (Debt Financing, 2008)
Disadvantages are mainly geared towards small businesses. A business that is just starting out will have very little revenue if any ...