What is an advantage of debt financing?

Debt financing has several advantages, one of which is that interest payments can be tax-deductible. When a business borrows money, the interest it pays on the loan can often be deducted from its taxable income, effectively reducing the overall tax burden of the business. This feature can make debt financing more attractive compared to equity financing, where dividends paid to shareholders are not tax-deductible.

This tax deductibility provides an incentive for businesses to leverage debt in their capital structure, as it lowers the cost of borrowing and can enhance overall financial performance when managed wisely. Companies can thus benefit from tax savings while also maintaining ownership control, as debt financing does not dilute ownership like issuing new equity would.

The other options do not accurately represent advantages of debt financing: documentation is generally required for debt financing, higher profit margins are not guaranteed simply through borrowing, and while debt financing does involve financial risk, it does not eliminate it; in fact, it can increase financial risk due to the obligation to make timely interest payments.