Which of the following is a disadvantage of adding capital to a business?

Adding capital to a business can influence several financial aspects, and one potential disadvantage of this process is negative gearing. Negative gearing occurs when the costs of financing an investment outweigh the income generated from it. In the context of a business, if capital is raised through borrowing, the interest payments on that debt can exceed the returns generated by the invested capital, resulting in losses.

This situation can be particularly challenging for businesses that do not generate immediate profits or sufficient revenue to cover the costs associated with the borrowed capital. As a result, the business may find itself in a position of financial strain, impacting its overall stability and growth potential.

In contrast, the other choices—positive cash flow, no interest payments, and increased return on equity—represent advantages or neutral impacts of adding capital to a business. Positive cash flow suggests that the business is generating sufficient income to cover expenses, while no interest payments indicate that capital has been raised through means that do not incur debt obligations (such as equity financing). Increased return on equity refers to the potential for shareholders to enjoy higher returns as a result of the business's improved performance due to the additional capital.