Debt can give opportunity to a business. Its benefits include being tax deductible, being able to pay it back with cheaper money
Debt can give opportunity to a business. Its benefits include being tax deductible, being able to pay it back with cheaper money, and lowering cost of capital (Block et al., 2019). Acquiring debt to expand or to improve can benefit the business long-term. It can also outweigh the negatives associated with taking on debt. A drawback of corporate debt is the increased money needed to make payments. It can caste a bad light on the business if it is seen as risky, due to financial need, or as the company being unable to use cash reserves. Other drawbacks can be having set payments, creating burdensome restrictions, and interfering with the company’s stock price (Block et al.,2019). These things can harm a company’s reputation. They can also help a company’s reputation. Acquiring debt and paying it back shows integrity. Being a risk taker can be seen as innovative and forward driven. Not paying cash can be seen as using debt as leverage. Leveraging debt to the benefit of the business can help a company to obtain a position that it otherwise would not have had. A company’s priorities need to be known before a person can make any decisions about utilizing financing. Assessing a company’s debt structure is one way to determine if a business is worth investing in, using as a resource for a separate business ventures, or if it has a stable financial future (Block et al., 2019). What kind of debt a company has can often tell more about a business than how much debt it has. Leasing versus financing gives important information to the person evaluating a company’s debt structure. So too does evaluating long-term versus short-term debt. Long-term financing with minimal short-term financing may mean the company is more stable and methodical in its approach to debt. Paying off a long-term loan is more likely to use more money due to it having higher interest (Block et al., 2019). It also shows a look toward the future. Short-term loans show a need for money immediately (Block et al., 2019). Growing a business and doing work that is going to impact it in the future shows a need for a long-term loan. Doing work that will impact a business in the present shows a need for a short-term loan. Utilizing the times interest earned ratio can also make it easier to make a decision about increasing or decreasing debt.Future value, present value, cash flow, profit margin, interest rates, debt to equity ratio and future earning potential are all things that can be used to determine if debt should be increased or decreased as well. In general, a business will want to obtain more financing if it is able to do so without it negatively impacting the business. Can the company repay the debt? Will it place an undue burden on the company to not use financing? Where is the business in its life cycle (Allen, 2019)? Answering those questions can help determine whether a business should increase or decrease its debt.
References
Allen, S., (2019). Pros and cons of debt financing for business owners
thebalancesmb.com. https://www.thebalancesmb.com/debt-financing-pros-and-cons-1200981 (Links to an external site.)
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.)
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