Financing plays a major role in the world of business. The reason for this important role is the fact that at some time or another any business needs financing,
most often from external sources.
Advantages of Debt Financing
Before moving on to the advantages of debt financing, lets take a look at what debt financing actually is. The term dent financing is basically a general term which can be used to apply to any loan which is made to any business. Following are some of the advantages of debt financing.
First of all, it is comparatively easier to obtain a debt as compared to financing through the form known as equity financing.
Equity finance is means selling a certain part of the company by selling stock in the stock exchange in which the company is listed. Another reason why debt financing is the better choice is the fact that obtaining capital through debt is cheaper.
Because of various costs such as transaction costs as well as some of the requirements which pertain to economies of scale, equity financing costs more.
If a business opts for equity finance, one of the major things he has to contend with is that a certain amount of the profit made in the business would have to be shared with the creditors who require both dividends on the investment they have made as well as those who want capital appreciation.
Another advantage of debt financing is that any interest expense which becomes payable is tax deductible. In case of equity financing there is the issue of double taxation. The business is taxed on the dividends they have declared as it is their income, and then when the shareholders receive the dividends, they are taxed as well.
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