Final answer:
Entrepreneurs using debt capital can maintain control over their company, benefit from tax deductions on interest payments, and potentially achieve higher returns on equity. However, careful management of leverage is essential to avoid financial distress.
Step-by-step explanation:
Entrepreneurs who use debt capital (leverage) to finance their companies benefit from several financial advantages. By borrowing through banks or issuing bonds, a company can preserve ownership and control since they do not have to issue stock and share equity with investors. This allows existing owners to retain a larger share of future profits and decision-making power. Additionally, interest payments on debt are tax-deductible, which can reduce the overall tax burden on a company.
Another important benefit is the potential for higher returns on equity due to leverage. When a company borrows at a lower cost of debt and invests in projects that yield a higher return, it can result in greater profitability. Moreover, using debt can signal to the market that the company has confidence in its future cash flows, as the obligations of interest and principal repayments must be met. However, it is crucial to manage leverage carefully to prevent over-indebtedness, which can lead to financial distress.