1. 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.
2. 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.
3. the company goes for the availability of this options then it has to face the following disadvantageous –
4. 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.
5. 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