Define borrowed capital and also explain its advantages and disadvantages?

                           

The borrowed funds for the business needs are known as debt financing. The business may need additional funds for meeting the needs or for expending the business. Therefore the creditor investor or financial institutions become the major sources of debt financing.

Advantages

1.                 Rate of interest:

The debts are secured by the assets of the business. The rate of interest is low but rate of profit is high. Therefore, the owners can earn more profit.

2.                 Taxation:

The interest on borrowed capital is created as revenue expense. The profit after charge other interest is low so taxation will be low. The lower give maximum the profit.

3.                 Voting rights:

The debt finance doesn’t have voting rights. The owners enjoy the monopoly of preparing policies about the business organization and expansion. They can allocate the profit according to their own wishes.

4.                 Short term needs:

The up and down in the business may be demand short term funds. The debt finance is best to meet the seasonal demand and can be repaid who extra funds are not needed.

5.                 Sick business:

The debt is helpful to cure the diseases of the business. To meet this financial needs of the organization. The sick business can contribute towards the national income through increased efficiencies.

Disadvantages    

1.                 Depression:

When the business activity is low the debts becomes costly, due to the high rate of interest. The business may suffer a loss after the payment of interest and other expenses.

2.                 Re-payment of debts:

When the debts becomes due. The owners not are in a position to re-pay it. It can increase the financial difficulty for the management. If the creditor not re-paid, he can go to the court for liquidation of the company.

3.                 Losses:

The amount of interest is a burden on the business. The high amount of interest reduces the profit margin but in case of losses it further increases the amount of loss. Therefore, the owners will have to face the heavy amount of losses. When there is no interest the amount of loss remains the same. Interest amount increases the loss more.