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Business & Marketing
English (U.S.)
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Risks Associated With Debt Financing: Business (Essay Sample)


In general, debt financing is less expensive than equity financing because the interest expense associated with debt is tax deductible; however, there are risks associated with debt that can make it unattractive and even unacceptable for a corporation. What are the risks that are associated with debt, and why might those risks be unacceptable to a corporation that needs money?


Risks Associated with Debt Financing
Risks Associated with Debt Financing
Debt finance should be used sparingly and corporations need to be careful because if they use it in excess, the decision-making process of the corporation is interrupted. This is because when the gearing level is high, creditors will demand to be involved in the decision-making process. Furthermore, they will insist on being represented on the board of directors. Moreover, it reduces the flexibility of the financial operations of the corporation because of the obligation to meet the regular payments to creditors(Guerard & Schwartz, 2007). This reduces the retained earnings that could be used to invest in other projects.
Additionally, the use of debt as a source of financing may li

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