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Sources Of Business Finance

Question
CBSEENBS11004288
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Describe the advantages and disadvantage of borrowed capital as compared with those of ownership capital.

Or

List any three advantages of borrowed funds. (Annual Exam. 2011)

Solution
The advantages of borrowed capital as compared with the ownership capital are as follows :

1. It does not affect the owners’ control over management;

2. Interest is treated as an expense, so it can be charged against income;

3. Fixed liability : Payment of interest and repayment of loans cannot be avoided even if there is no profit. Default in meeting these obligations may create problems for the business. To begin with, business may suffer on account of decline of its credit worthiness. Continuing default may even lead to insolvency of the firm.

4. Adequate security : It requires adequate security to be offered against loans. Borrowed fund are usually available upto 80% of the value of assets, depending on the nature and value of the asset.

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