Decoding Debentures: Your Golden Ticket to Financial Security

PRIYADARSHINI JHA
Blog
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07 December, 2023

Fundraising is a crucial and necessary part of running a business. Due to the various available options, sometimes it can be a little confusing to choose one over the others. Let’s dive deep into why debentures stand out as the most viable long-term investment option owing to their ability to deliver consistent returns.
 
Debentures are a type of long-term debt instrument that offers a regular stream of income without being impacted by market fluctuations. It delivers several advantages that make them appealing to businesses seeking capital. For investors seeking a diversified portfolio, debentures serve as an alternative to equity investments. They offer a different risk-return profile compared to stocks, providing a way to balance investment portfolios. Let’s get into the discussion of some potential advantages of debentures.

1. Lower Interest Rates:

Debentures are a favourite choice of companies that prefer not to pay a lot of interest. This helps them reduce the financial burden and improve profitability for the company. Generally, debenture holders are paid a fixed interest rate that is lower than other fund sources like equity or bank loans.

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2. Flexibility in Repayment Terms:

Debentures come with flexibility in repayment terms. Debentures offer customised repayment schedules aligned with the cash flow of the company, which is not the case with bank loans. Managing financial obligations becomes handy with debentures, and companies get an opportunity to avoid unnecessary strain on their finances.

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3. No Dilution of Ownership:

Equity is a bit painful for the owner due to diluting ownership of the company among the shareholders. However, that is not the case with debentures. Debentures provide the funds to operate the business or expand without sacrificing ownership. In fact, issuing debentures can help the owners get full control of their company.

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 4. Tax Benefits:

Debentures serve as a tool of tax savings for both parties involved, say the issuing company of the debenture holder. The interest paid on the debentures is usually tax-deductible for the company, which reduces its overall tax liability. On the other hand, for debenture holders, interest received is often taxed at a lower rate compared to other forms of income.

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5. Diverse Investor Base:

Debenture holders are from a variety of backgrounds. They may be institutional investors, retail investors, or even other companies. This vast range of investors enhances the scope of more funds. Attracting diverse investors can also increase the credibility of the company and provide easy access to expats and helpful networks.

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6. Financial Discipline and Better Creditworthiness:

The debt issue comes with the responsibility of having a planned repayment strategy and structured payment schedule. This inculcates financial discipline in the company and promotes practices for responsible financial management. While the company is involved in regular interest payments and principal payments to the debenture holder, it’s contributing to the creditworthiness of the company, thus improving its reputation in the market.

Companies need to make careful considerations before making a choice about the funds from the market. With smart usage and utilising the advantages of debentures, companies can ensure the sustainability and growth of the company. In essence, debt securities offer lucrative long-term investment opportunities due to their stability, predictable returns, and potential for yielding higher earnings.
 
Please feel free to comment below if this idea seems helpful in recalling the benefits of debentures when considering them as an investment option.

Happy Fundraising!

Priyadarshini Jha
Senior Learning Facilitator

UniAthena

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