ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A big advantage of debt financing is the ability to pay off high-cost debt, reducing monthly payments by hundreds or even thousands of dollars. Reducing your cost of capital boosts business cash flow.

Detailed explanation-2: -Lenders require that borrowers pay back the principal amount of a debt, as well as interest in addition to that amount. The interest rate, or yield, demanded by creditors is the cost of debt-it is demanded to account for the time value of money, inflation, and the risk that the loan will not be repaid.

Detailed explanation-3: -When interest rates are high, it’s more expensive to borrow money; when interest rates are low, it’s less expensive to borrow money. Before you agree to a loan, it’s important to make sure you completely understand how the interest rate will affect the total amount you owe.

Detailed explanation-4: -Doesn’t dilute owner’s portion of ownership. Lender doesn’t have claim on future profits. Debt obligations are predictable and can be planned. Interest is tax deductible. Debt financing offers flexible alternatives for collateral and repayment options. 14-Jul-2020