Advantages and disadvantages of debentures

Advantages of Debentures

• By issuing the debentures, the controlling of the existing equity shareholders does not get affected as the debentures do not carry any voting rights.
• Cost associated with debentures is comparatively less than the cost associated with the equity shares. As such, it is economical for the company to issue debentures.
• During the period of depression when the investors are not prepared to take much of the risk, the company may be compelled to issue debentures as a source of raising long term capital.
• The company might have borrowed various small amount of debts of short duration which may prove to be costly and burdensome for the company. All these small debts may be converted into a single issue of debentures which may prove to be less costly for the company.

• Fixed rate of interest payable by the company irrespective of non-availability of profits.
• Security available for the investment.

Disadvantages of Debentures

• By issuing the debentures, the company accepts the risk of two types. One to pay the interest at a fixed rate, irrespective of the non-availability of profits and second, repayment of principal amount at the predecided time. If earnings of the company are not stable or if the demand for the products of the company is highly elastic, debentures prove to be risk proposition for the company. Any adverse change in the earnings or demand may prove to be fatal for the company.
• Debentures are usually a secured source for raising the long term requirements of funds and usually the security offered to the investors is the fixed assets of the company. A company which requires less investment in fixed assets, viz. A trading company may find debentures as a wrong source for raising the long term requirements of funds as it does not have sufficient fixed assets to offer as security.