Debt is the liquid cash borrowing from outside source with the promise that principal as well the interest will pay on the borrowing amount as per the agreement of the lender and the debtor.
Debt capital is good from point of view of the business world as it not changes the ownership and on the other hand its interest charged on profit so the tax on the profit will save.
Main advantage of the debt finance:
1) Ownership not change: Fund collecting by issues of shares the ownership position change but on the other hand, use of debt fund not changes ownership of your business.
2) Deductible from profit before tax: Interest and debt repayment is assumed as expenses and it’s deducted from the profit, which help to get the advantage of tax reduction.
3) Lower interest rate: Now the reduce interest rate is also create a demand for debt finance.
Main disadvantage of the debt finance:
1) Repayment: Debt finance is not change the ownership but still it is one kind of liability which you need to pay to the lender.
2. Affect on credit rating: Due to any financial crunch if you unable to pay your debt than it will affect your credit rating.
3. Debt is affect on liquid assets: Debt payment will reduce the liquid cash of the business which create a liquid capital problem .
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