ANALYSIS ABOUT THE OPTION 3rd
- Here company becomes the guarantor that’ s why if the principal debtor become the defaulters either in the payment or repayment of interest or loan respectively, then guarantors becomes the liable for the same. So it is very risky for the Company to avail this option.
Thus in my opinion the company should not go for this option at all as it is very risky and instead of it it may avail the second option that is very good as compared to it.
DISADVANTAGES OF THIS OPTIONS
- As the interest on debentures has to be paid every year whether there are profits or not, it becomes burdensome in case the company incurs losses.
- Usually the debentures are secured. The company creates a charge on its assets in favor of debenture holders. So a company which does not own enough fixed assets cannot borrow money by issuing debentures. Moreover, the assets of the company once mortgaged cannot be used for further borrowing.
- the company goes for the availability of this options then it has to face the following disadvantageous –
- Debenture-finance enables a company to trade on equity. But too much of such finance leaves little for shareholders, as most of the profits may be required to pay interest on debentures. This brings frustration in the minds of shareholders and the value of shares may fall in the securities markets.
- Burdensome in times of depression: During depression the profits of the company decline. It may be difficult to pay interest on debentures. As interest goes on accumulating, it may lead to the closure of the company. Until now you have learnt about issue of shares and debentures as two main sources of raising long term finance.
If the Company goes for the availability of his option then as it requires creation of the Charge that may also involve some cost or expenses relating to charge and may have impact on the assets of the company and if default is made by the Company then it may have to loose its assets as however that will depend on the terms and conditioned mentioned in the charge deed for the purpose between the interested parties
Thus the company may go for raising fund through issuing debentures this may results into the increment of the creditors of the company which will take the fixed interest as agreed and repayment of the same invested money on the time as agreed.
If Company wants to go got issuing debentures then it is required to be a public one and if it agrees with the advantageous and suffer disadvantageous of the option 4 as discussed then it can go for the same. here the conditions as expressed by the existing members is that they want to have the full control over the company and little transparency then it may borrow loan privately and can get the advantage thereof being a private one .
Thus in all the above discussed option it is the discretions of the existing members which one to choose which may be based on the above logical discussion.