## Debenture Financing
### Why companies use debentures
Debentures are debt instruments that allow companies to raise long-term capital without diluting ownership. They come with fixed interest obligations, which can be both an advantage and a risk.
### Advantages
| Advantage | Explanation |
|---|---|
| No Dilution of Control | Debenture holders have no voting rights |
| Tax Shield | Interest is a tax-deductible expense → lowers effective cost |
| Inflation Advantage | Fixed interest means the real cost decreases during inflationary periods |
### Disadvantages
| Disadvantage | Explanation |
|---|---|
| Fixed Financial Commitment | Interest and principal must be paid, even in losses |
| Restrictive Covenants | Lenders may impose conditions limiting management freedom |
| Increased Financial Risk | High debt-to-equity ratio raises the risk of default |
| Large Repayment at Maturity | Bullet repayment can strain cash flows |
### Preference Shares vs. Debentures – Key Differences
| Basis | Preference Shares | Debentures |
|---|---|---|
| Ownership | Special kind of share capital | Type of loan from the public |
| Payment | Priority dividend + return of capital on winding up | Fixed percentage interest |
| Nature | Hybrid – part equity, part debt | Pure debt with fixed maturity |