A disadvantage of debt financing is that creditors often impose covenants on the borrower.

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Creditors often impose covenants, which are provisions in the loan agreement that restrict the borrower’s actions, such as limiting how much additional debt the borrower can take on or requiring certain financial ratios to be maintained. These covenants can limit the borrower’s flexibility and increase the risk of default if they are not met.

A Disadvantage of Debt Financing Is That Creditors Often Impose