What Are Disadvantages of Debentures?


Quick Answer

Debentures are relatively risk-free for investors as they are issued by trusted companies and government organizations in the form of T-Bills or bonds, but they can have disadvantages to the company that issues them because the bonds have a fixed interest rate that may cause loss if the value of a company's products decline with low-interest conditions, as reported by eFinanceManagement. Other factors that hinder the issuer are that the loans affect the company's ability to further secure funding and the bonds are issued in large denominations that require repayment after a fixed amount of time.

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Full Answer

The practice of issuing debentures to the public has some major drawbacks based on the terms of the agreement with investors compared to the conditions of the marketplace during the time that they are active.

Fixed interest rates need to be paid yearly and don't fluctuate alongside the market, meaning that if a rise in production of a company's products occurs, the interest payment remains constant and can hinder a business's ability to operate.

The practice of issuing debentures or debt financing raises the leverage of a company, which can lead to bankruptcy or the liquidation of a company's assets to pay back the loans, effectively shutting down the project that the bonds were meant to finance, as explained by eFinanceManagement.

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