Debt Financing or Borrowed Funds

3.  Not Permanent Capital

A debt financing or borrowed fund is not a permanent capital to the organizations because it is given for particular period. It cannot be used permanently by organizations but they have to repay at the specified terms and conditions.    

Advantages of Debt Financing or Borrowed Capital

1. Advantage of trading on equity
2. Tax advantage to the firm: Debt financing can be used to lower the rate of tax payment by showing higher debts in the financial statements.
3. Appropriate time horizon: Debt is always paid for certain period of time; therefore, organizations can utilize the fund accordingly and prepare themselves for the repayment.
4. No interference in management: Management is free from any interference from creditors. 
5. Flexibility in the capital structure: Debt financing makes the capital structure flexible by having both debt and equity.

Disadvantages of Debt Financing or Borrowed Capital

1. Payment of credit: The principal capital is paid at the every due date without any apprehension to the financial creditors of a firm.
2. Interest payment: Interest amount is regularly paid by a firm whether it is earning profits or losses.
3. Interest rate in crisis: During the worst economic conditions, interest rate remains same but the rate of return (ROR) falls due to which firms suffer losses.
4. Maturity of loans: If the sufficient amount is not available to pay the loans at the period of loan maturity, a firm could be declared insolvent.

Limitations of Debt Financing or Borrowed Capital

1. Need for security
2. Risk for efficient functioning
3. Fixed financial burden on company
4. Reduced credit worthiness