Sample Essay

Debt financing can be advantageous for the company as it allows the business to borrow money while not selling a share or stake in the ownership to the lender. Instead the company has to make timely interest and principle repayments in installments. The funds from debt financing can be used to run the business as well as further invest in assets for the company while the profits earned on the investment does not have to be shared with the investors.

A percentage of interest does have to be paid routinely in addition to the principle borrowed but this interest can be treated as a business expense and can be deducted from the tax. Debt financing however can also be disadvantageous for the company as the funds borrowed have to be repaid with interest. At the time of borrowing funds the company also has to provide the possible sources of repayment.  “Some debt financing is acceptable, but if a company relies too heavily on this kind of financing it may impact negatively on its credit rating and make it difficult for funds to be raised in the future.” (‘Pros and Cons of Debt and Equity Financing’)

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