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Should a company be financed entirely with debt? Why or why not?

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Should a company be financed entirely with debt? Why or why not?

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No, A company should not be finance entirely with debt because of multiple reasons. An optimal capital structure should be an appropriate combination of debt and equity.

Let us see some of the considerations with financing by debt:

Must be repaid or refinanced.
Requires regular interest payments. Company must generate cash flow to pay.
Collateral assets must usually be available
Debt providers are conservative. They cannot share any upside or profits. Therefore, they want to eliminate all possible loss or downside risks
Interest payments are tax deductible
Debt has little or no impact on control of the company
Debt allows leverage of company profits

From the above mentioned points, we see that there are benefits as well as disadvantages with running the company entirely on debt. Though debt allows the promoters of the company to retain control, too much debt is always a burden on the company ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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