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BORROWED FUNDS

-CH.PADMAVATI

INTRODUCTION
Business finance refers to money and credit
involved in business. It involves procurement utilization of funds for business purposes. Sources of finance are Owners funds Borrowed funds

BORROWED FUNDS
Borrowed funds consists of the amount
raised by way of loans and credit.

It is also known as borrowed capital.

BORROWED FUNDS IN CASE OF VARIOUS FORMS OF BUSINESS ORGANIZATIONS


Sole proprietorship Loans raised by the
proprietor on his personal security or on the security of his personal assets.

Partnership Firm

Loans raised by the


firm on the personal security of the partners or on the security of the assets.

Company

Borrowings raised
by issue of debentures, through loans or credit.

CHARACTERISTICS
Fixed obligations Not permanent capital
No Right of control over management

MERITS
Tax advantage Advantage of Trading on Equity
No Risk of Loss of Control Lower Cost of Debt

LIMITATIONS
Involves fixed obligations Requires adequate security Exists the risk of insolvency Increases the risk of owners

SOURCES OF BORROWED CAPITAL

Debentures Loans
Public deposits

DEBENTURES
A debenture is a written instrument acknowledging a
debt and containing provisions as regards the repayment of principle and the payment of interest at a fixed rate. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements.

A loan is a type of debt. Like all debt instruments, a


loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount.

The loan is generally provided at a cost,


referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract.

PUBLIC DEPOSITS
The term 'public deposit' implies any
money received by a company through the deposits or loans collected from the public. The public includes the general public, employees and shareholders of the company but excludes the money received in the form of shares and debentures.