Advantages of Debentures as a Source of Finance

What are the various sources of finance available for a business? Explain the advantages of any one main source of finance for firms?

Every company uses finance for its survival and growth. Internal as well as external sources of finances are used by the company. Internal sources of finance include investing profits in the business and selling of assets. External sources include short-term and long-term sources of finance.   Trade credits, factoring and overdraft are some sources of short-term finance. Loans, debentures, mortgages, funding from grants, share capital, hire purchases, leasing are some sources of long-term finance.  

Advantages of Debentures as a Source of Finance

Debentures are the external source of finance. They have many advantages. Suppose if the company is using debentures as a source of finance, then the company has the following benefits:

Advantages of Debentures as source of finance:

1. Debentures are cheaper source of finance.
2. The interest rate of debentures is fixed and it should be paid irrespective of profits which increases the commitment and alertness of the firm in utilizing the cash flows effectively.
3. Debenture holders do not share profit, but they are entitled to certain percent of interest. Thus there will be no dilution in the profit sharing.
4. The issuance of debentures does not affect the ownership of the company because debenture holders do not have voting rights.
5. Debentures help in tax savings because the interest paid on them is charged against the profits.
6. Generally debentures are issued for a long-term. Hence the entity can utilize the funds for a maximum benefit.