Debt Financing

Due to the integral relationship that debt shares with fundamental financial gain, it is essential to allocate company assets responsibly and with a degree of insight. Managing cash itself can be taxing and avariciously clinging to it can be just as harmful as wastefully spending it. Every decision is tightly linked with an economic significance and must be made not only according to the organization's understanding of how its choice is applied but also with some consideration towards externalities and how they could feasibly alter cash flow. As long as the company has a stable cash flow, debt financing as a funding strategy may be advantageous for shareholders.

Debt financing, in this instance, might be considered as a decent alternative insofar that it offers more flexibility, and it is a fairly sound form of financing that allows the most possible freedom in regards to how the individual runs their business. On the contrary, equity financing does not afford this liberty to the borrower. Debt financing can also be incorporated as part of “short term or long term” (NFIB.com, 2009, para. 4) strategies to raising capital. Something to be wary of, however, is taking too much debt altogether, which becomes more problematic than necessary. The National Federation of Independent Business (2009) advised “if [business owners] rely on too much on debt and have cash flow problems, [they] will have trouble paying the loan back” (NFIB.com, 2009, para. 4). Subsequently, long term consequences of non-payments are often severe.

Since debt financing is traditionally a sound strategy, it is important to use the information that is gained through the process and applying it day by day. For example, “borrowing in a tight credit market” (UCLA Anderson School of Management, producer, 2009) bears the tricky hurdle of transforming into a “‘high risk’ by potential investors” (NFIB.com, 2009, para. 4), and, as such, it might ultimately inhibit a company’s cash flow and capacity for growth. Debt financing can be a good strategy if the individual aims to get a footing though it is hardly a cornerstone by establishing a ground floor for their cash flow and risk in order to provide better returns to their investors.

References

NFIB.com. (2009, October 17). Debt vs. Equity Financing: Which Is the Best Way for Your Business to Access Capital? National Federation of Independent Business. Retrieved from http://www.nfib.com/article/ital-50036/

UCLA Anderson School of Management (Producer). (2009, April 10). Judson Caskey: Under-levered firms earn better returns [Video]. Retrieved from http://www.youtube.com/watch?v=IjwUovJcDH8&feature=youtu.be