What are the Advantages and Disadvantages of Debentures ?

Long term debt financing is majorly categorized into term loan and debentures. Debentures are one of the common long term sources of finance. They normally carry a fixed interest rate and a certain date of maturity. Interest is paid every year and principal is paid on the date of maturity. Term loan carry a fixed interest rate and the payment is done in installments which is consisted of both principal and interest.

Term loan is lent by a financial institution or a bank so the financier is the bank / financial institution whereas the debentures are issued to general public and therefore the financier is the general public. This is the basic difference between these two types of long term source of debt finance.

Since, both debenture and term loan are a type of debt financing, they share basic characteristics of a debt and hence their advantages and disadvantages are also similar. Following are some benefits and disadvantages of debt financing (debentures or term loans) from the point of view of a company.
From an investor point of view, the prime advantages of investing in debenture is the fixed and stable return with preferential rights of payment at the time of liquidation in comparison to equity or preference shares. The main disadvantage of preferring debenture over equities is that the debenture holder does not get right to vote and there is no profit sharing. The returns are limited to the extent of interest irrespective of the higher or lower earnings of the company.

 

 

 

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