Give limitations of debt finance/disadvantages of using debt finance to the company

      

Give limitations of debt finance/disadvantages of using debt finance to the company.

  

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Lydia
Limitations of debt finance/ disadvantages of using debt finance to the company.

1. Interest is a legal obligation and failure to pay it may lead to company into receivership and consequently liquidation.

2. Using debt finance entails conditions and restrictions as to its use and this makes it non-flexible finance which can only be invested in those ventures approved by the lenders.

3. Its use on large scale increases the company’s gearing level which exposes the company to incidences of receivership and thus liquidation.

4. It is not usually long-term finance and the payment of principal leaves the company in financial strain and may cause liquidity problems to the company.

5. the use of excessive debt finance; beyond 67% level puts the company at the mercy of the lenders because they can come in to control their interests which dilutes the control of owners and this may lead to lower share prices.

lydiajane74 answered the question on May 9, 2018 at 19:35


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