Check out Advantages and Disadvantages of Debentures discussed below. So let us find out some information on advantages and disadvantages to know more about debentures. The debentures which are generally issued by the corporations, are promises to pay specific amount of principal or money at a specified time or date over the particular course of the loan tenure, during which time interest is paid at a fixed rate on decided dates.
Advantages of Debentures :
Debentures is used to provide long terms funds to the company when needed.
Debenture holders usually do not have any rights of voting and hence debt financing does not result into dilution of control
Generally the rate of interest which is being paid to debentures is lower than the rate of interest which is paid on shares.
In case of debenture , it can be redeemed when the company has surplus funds.
Debentures are less costly, fixed payment on of interest and no ownership dilution.
Disadvantages of Debentures :
It becomes difficult for common people to buy debentures as they are of high denominations.
Problems such as cash outflows, financial risk, restricted convenants and obligatory payment is observed
Compared to stocks, the debentures are more secured but will lead to lower rate of theoretical return of funds.
Debenture holder are not consider the owners of the company.
Debenture Holder wil have no right to vote during the general meeting of the company
Generally debenture financing may enhance the financial risk
They have a fixed maturity hence the provision has to be made for the repayment
As debentures can be considered as one of the secure investment the returns are less.
During the tenure of debenture , payment of interest on debenture is mandatory and hence at times when company is making a low profits. Non payment of the interest can lead to bankruptchy of the firm or a company.