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Borrowed Capital

These funds are raised by way of loans and credit from the public, banks and financial institutions. The sources of borrowed capital include debentures, public deposits, banks, etc. The characteristics of borrowed capital are:

(i)    Temporary Source. Borrowed funds are a source temporary capital to the business.

(ii)    Time Horizon. Funds are borrowed for different periods. They may be raised for long-term, medium-term and short-term periods. After the period is over, they have to be paid back.

(iii)    Fixed Rate of Interest. The interest on borrowed capital is to be paid at a fixed rate at regular intervals.

(iv)    Control. The lenders do not have any right of control over the management of the business.

(v)    Security. borrowed funds may be backed by the security of tangible assets of the business.

The advantages of borrowed capital are as follows:

(i)    It can be raised for a specified period and thus paid back after maturity.
(ii)    It does not affect the shareholder’s control over management of the company.
(iii)    It provides flexibility to the capital structure of the company.
(iv)    Only a fixed rate f interest is to be paid even during periods of high profits.
(v)    It offers the advantage of ‘trading an equity’.

The limitations of borrowed capital are as follows:

(i)    Adequate security of fixed assets is required to raise borrowed capital.
(ii)    There is fixed liability on the company to pay interest at a specified rate on borrowed funds every year.

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