Debt financing is funding investments or expenditure using money borrowed from an outside source under condition of repaying the principal and the agreed-upon interest on a set schedule. Read on for an understanding of the pros and cons of debt financing.
Debt financing is borrowing money from external sources to run a business, or make new investments.The borrower receives the amount required, usually a large captal sum upfront, and agrees to repay the same with applicable interest in installments, usually equated monthly investments. Most debt financing are long term in nature.The borrower usually needs to pledge some collateral security such as existing assets as a safeguard for the creditor in the eventuality that money invested does not bear fruit and the debtor is unable to repay the loan.
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, 4000);An important source of this type of financing is the bank, but many private companies, and even friends and relatives offer such financing.
Debt financing is a major type of funding and has both advantages and disadvantages.
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Reviewing the pros and cons of debt financing, debt financing offers many advantages for the debtors. Some such advantages include:
The advantages of debt financing notwithstanding, this financing model also have many shortcomings. Some of them include:
Comparing the advantages and disadvantages of debt financing, debt financing remains suitable if the cash is put to high growth ventures with stable cash flows.