What are the advantages and disadvantages of long term debt financing? Advantages and disadvantages

Advantages () Low financing risk. Since there is no fixed maturity date for ordinary **, there is no need to pay fixed interest, and there is no risk of not being able to repay the principal and interest.

Cost of FundsIn general, the cost of long-term debt is higher than the cost of short-term debt. This is because;

1) The interest rate on long-term liabilities is higher than that on short-term liabilities.

2) Long-term liabilities are inelastic. After an enterprise obtains long-term debt, it is not easy to repay it in advance during the debt period, even if there is no need for funds, so it has to continue to pay interest.

Financial RiskThe financial risk of short-term liabilities tends to be higher than that of long-term liabilities because:

1) The maturity date of short-term liabilities is approaching, and it is easy to have the risk of not being able to repay the principal on time.

2) Short-term liabilities also have greater uncertainty in terms of interest costs. Raising funds from short-term liabilities requires constant debt renewal, and it is uncertain how much interest will be on the next borrowing after the maturity of this borrowing because the interest rate on short-term liabilities in the financial markets is very volatile.

Relatively speaking, short-term liabilities are relatively easy and quick to acquire, while long-term liabilities are more difficult to obtain. Because creditors often bear greater financial risks when providing long-term funds, they generally need to conduct a detailed credit assessment of the borrowing enterprise, and sometimes require certain assets as collateral.

Pros:1Funding is faster.

Compared with equity financing, debt financing does not need to go through complex approval procedures and issuance procedures, such as bank loans, financial leases, etc., and can obtain funds quickly.

2.Funding flexibility is high.

On the one hand, it needs to go through strict approval for equity financing; On the other hand, from the perspective of the enterprise, since the equity cannot be returned, the equity capital will permanently burden the capital cost to the enterprise in the future. With the use of debt financing, it is possible to flexibly negotiate the terms of debt, control the amount of financing, and arrange the time for obtaining funds according to the operating and financial conditions of the enterprise.

3.The capital cost burden is lighter.

In general, the cost of capital for debt financing is lower than for equity financing. First, the financing costs such as fees for obtaining funds are low; Second, the cost of interest, rent and other capital expenses is lower than that of equity capital; The third is that capital costs such as interest can be paid before taxes.

4.Financial leverage can be utilized.

Debt financing does not alter the control of the company, so shareholders do not object to the liability for reasons of dilution of control. Creditors can only receive fixed interest or rent from the enterprise and cannot participate in the distribution of the company's residual earnings. When a company's return on capital is higher than the debt rate, it increases the earnings per share of common shareholders, improves the return on equity, and increases the value of the company.

5.Stabilize the control of the company.

Creditors do not have the right to participate in the operation and management of the enterprise, and the use of debt financing will not change and disperse the control of shareholders over the company.

Disadvantages of debt financing:

1.It cannot form a stable capital base for the enterprise.

Debt capital has a fixed maturity date and needs to be repaid at maturity and can only be used as supplementary capital for the business**. In addition, the debt that has been removed often requires credit rating, and it is often difficult for enterprises and start-ups without a credit foundation to obtain sufficient debt capital. After the existing debt capital reaches a certain proportion in the capital structure of the enterprise, it is often difficult to obtain new debt funds due to the increased financial risk.

2.The financial risk is high.

Debt capital has a fixed maturity date, a fixed interest burden, and debts obtained by way of mortgage, pledge and other guarantees may have special restrictions on the use of capital. These require enterprises to have a certain ability to repay debts, to maintain the liquidity of assets and the level of return on assets, as a guarantee of debt repayment, put forward higher requirements for the financial status of enterprises, otherwise it will bring financial crisis to enterprises, and even lead to bankruptcy.

3.Funding is limited.

The amount of debt financing is often constrained by the capital strength of the lending institution, and it is impossible to raise a large amount of capital at one time like the issuance of bonds**, which cannot meet the company's large-scale financing needs.

1. Advantages and disadvantages of debt financingAdvantages and disadvantages of debt financing: For corporate shareholders, debt financing has the following advantages and disadvantages: Advantages:

No new shareholders were absorbed, the original shareholding structure was maintained, the equity was not diluted, and the control was consolidated. Disadvantages: No new shareholders were absorbed, the company's operational and financial risks were not dispersed, and the risk was borne alone, which was extremely stressful.

2. Control of Debt FinancingDue to the relatively large risks borne by debt financing, it is necessary to strengthen the control of three aspects: first.

1. Strategic evaluation of debt financing: assess whether debt financing is in line with the overall development strategy of the enterprise; Whether the scale of corporate financing is appropriate. Enterprises should strictly review whether the financing plan is in line with the overall strategic direction of the enterprise, and only the financing plan that meets the needs of the enterprise development is feasible.

In terms of the scale of financing, on the one hand, we should not be too greedy for more. Abundant funds are an important guarantee for the development of enterprises, but any funds have costs, enterprises must consider from a strategic perspective when financing, and must not blindly raise too much funds, resulting in idle bonuses, and at the same time increase the financial burden on enterprises; On the other hand, it is necessary to avoid insufficient financing, which will cause enterprises to lose investment opportunities and cause difficulties in their operations. Clause.

2. Economic risk assessment of the financing plan: mainly analyze whether the financing plan meets the economic requirements, whether the required funds are obtained at the lowest financing cost, whether there is room to reduce financing costs and better financing methods, whether the financing period is economical and reasonable, and whether the interest and dividend levels are within the affordable range of the enterprise. If you finance the same funds, you will face different financing costs if you choose ** and choose bonds; Choosing different types of bonds or maturity structures will also face different costs, so companies must carefully evaluate the financing costs and evaluate the economics of the financing plan in combination with the benefits and risks.

Clause. 3. Risk assessment of the financing plan: Analyze the risks faced by the financing plan, especially the interest rate, exchange rate, monetary policy, fiscal policy, macroeconomic trends and other important factors, make a comprehensive assessment of the risks faced by the financing plan, and effectively take preventive measures against possible risks. The above is an introduction to the advantages and disadvantages of debt financing and the control aspects, I hope it will be helpful to you.

Article 12 of the Regulations on the Administration of Enterprise Bonds stipulates that the issuance of enterprise bonds by enterprises must meet the following conditions: (1) the scale of the enterprise meets the requirements stipulated by the state; (2) The financial accounting system of the enterprise conforms to the provisions of the state; (3) Having the ability to repay debts; (4) The economic benefits of the enterprise are good, and the company has been profitable for 3 consecutive years before the issuance of Tongsong bonds; (5) The use of funds raised is in line with the national industrial policy. Article 19 of the "Regulations on the Administration of Enterprise Bonds" stipulates that no unit shall purchase enterprise bonds with the following funds:

1) Budgetary allocations; (2) Bank loans; (3) Other funds that shall not be used for the purchase of corporate bonds as stipulated by the state. Institutions that handle savings business are not allowed to use the savings deposits they absorb to purchase enterprise bonds.

Debt financing is a way for enterprises to meet their capital needs by borrowing funds from banks and other financial institutions. Compared with equity financing, debt financing has the following advantages and disadvantages:

Pros:1Interest expenses can be deducted before corporate income tax to reduce corporate tax burden; 2.

The cost of debt financing is relatively low compared to equity financing, especially during periods of low interest rates; 3.Creditors do not interfere in the daily operation and management of the enterprise, and the enterprise still maintains a certain degree of autonomy; 4.Creditors only enjoy a fixed interest income and do not share the future profits of the enterprise, which reduces the impact on shareholders.

Cons: 1Enterprises need to pay a high interest burden, which increases the financial cost of enterprises; 2.

Debts need to be repaid on time, and enterprises must ensure a stable flow of funds, otherwise they may face the risk of default; 3.It is difficult to solve the high-risk capital needs of enterprises through debt financing; 4.Excessive debt can seriously affect a company's credit rating, which in turn affects its ability to raise funds.

To sum up, debt financing has the advantages of low cost and strong autonomy, but it requires enterprises to face disadvantages such as high interest burden and debt repayment pressure, and enterprises need to analyze and choose debt financing according to their own business conditions and financing needs.

The advantages of debt financing are ().

a.Section type and tax search.

b.Low cost of capital.

c.Financial leverage.

d.Low risk.

Correct Answer: Tax saving; Low cost of capital. Financial leverage.