Risks Associated With Debt Financing: Business

Risks Associated with Debt Financing Name Institution 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 in the board of directors. Moreover, it reduces the flexibility of 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 limit the corporation’s ability to acquire additional capital from other sources (Chandra, 2008). For instance, a creditor may limit the corporation from acquiring more debt, or may keep away new investors and creditors who are not willing to put their money in a corporation that is highly in debt. Thus it makes the borrowing capacity of corporations rigid, which eventually affects the prices of stocks, especially for public companies. Debt financing requires firms to make periodic payments to repay the principal and the interest charges as per the agreement. This makes debt financing risky to use, especially during a recession because it can force corporations into receivership. Firms may lack funds to service the debt during a recession and in such case...