Disadvantages of Debentures

  • The fixed interest charges become fixed burden on the company, which have to be paid even if there are no profits. Non-payment may lead to legal complications and may even end up in winding up of the company.
  • Use of debt financing increases the risk perception of the firm
  • A company whose earnings are not stable and involve high initial investment cannot use this source of funds.
  • Payment of interest on debenture is obligatory and hence it becomes burden if the company incurs loss.
  • Debentures are issued to trade on equity but too much dependence on debentures increases the financial risk of the company.
  • Redemption of debenture involves a larger amount of cash outflow.
  • During depression, the profit of the company goes on declining and it becomes difficult for the company to pay interest.

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