What can be a disadvantage of relying heavily on debt financing?

Relying heavily on debt financing can indeed increase the potential for bankruptcy, making this the correct answer. When a company takes on significant debt, it commits to regular interest and principal payments regardless of its financial performance. If the company's income fluctuates or decreases, meeting these obligations can become challenging. This financial strain can ultimately lead to insolvency, especially if the company is unable to generate sufficient cash flow to pay its debts.

Debt financing can come with benefits, such as potential tax advantages, where interest payments are often tax-deductible, making it attractive for some companies. However, too much reliance on debt can overshadow these benefits by exposing the company to higher financial risk and the possibility of failing to meet its obligations during downturns or poor financial periods.

Increased liquidity and lower capital costs may be advantages typically associated with some levels of debt, but they do not take precedence in the discussion of the risks associated with overleveraging. This focus on the potential for bankruptcy emphasizes the importance of maintaining a balanced approach to financing.