What is owner’s fund or capital or equity finance? And what are its advantages and disadvantages?

The finance provided by the owners of business is called equity financing. The profit retain in the business is also a part of the equity finance. The owner contributes for meeting the working capital as well as fixed capital needs of the business.

Advantages

1.                 Owner’s fund:

The large part of the finance is provided by the owners without any security. The interest is not allowed on owners fund because these funds are free from any charge.

2.                 Profit rate:

In the case of owner fund the rate of profit increases because the interest is not charged to profit and loss account. The amount of interest also becomes part of profit. There are no borrowed funds so there is no interest.

3.                 Free asset:

The owner’s capital is provided without any security. Therefore, the assets are free in the hands of management. The free asset can be used to raise additional funds.

4.                 Permanent basis:

The owner’s funds are provided on the permanent basis. There is no need to create any fund for the repayment of the debits. The owners fund increases the financial footing of the business.

5.                 Business condition:

There are up and down in the business activities. During bad trade losses doesn't effect the business to a large extant. Interest on borrow funds increases the losses, but there is no such interest in case of owner fund.

Disadvantages  

1.                 Business expansion:

The profit rate is high and interest on borrowed capital is low. During the period of good trade, the business expansion is possible with low rate of borrowed capital but owner fund is expansion.

2.                 High taxes:

The taxes are paid on income. If interest is not payable on funds, the profit are maximized, therefore high taxes are to be paid to the government.

3.                 Solvent of business:

The business can do its work so long it is able to pay debts on the due dates. Owners fund may not be sufficient to meet the claims of the creditors. therefore there may be a risk of business failure.

4.                 Surplus fund:

The surplus fund earned no profit. The management may be lazy. Or there may be a depression in the country therefore surplus fund dhow the poor management policy.