What is the main disadvantage of utilizing debt financing?

The primary disadvantage of utilizing debt financing lies in the requirement of making fixed payments of interest and principal. When a company takes on debt, it is obligated to repay this borrowed amount along with accrued interest, regardless of its financial performance. This creates a fixed financial burden that can strain cash flow, especially during downturns or when revenue is not stable. If a company experiences a downturn or unexpected expenses, fulfilling these debt obligations can become a significant challenge, potentially leading to financial distress or even bankruptcy if the debt cannot be serviced properly.

On the other hand, the options that mention ownership dilution for shareholders, access to a larger investor base, and no regulatory restrictions focus on other aspects of financing. They do not encapsulate the inherent risk of fixed payment obligations associated with debt financing. While dilution of ownership is a concern with equity financing, it is not applicable to debt. Access to a wider base and a lack of regulatory restrictions may be viewed as advantages, which do not address the fundamental disadvantage posed by the burden of debt repayment.