CAN U EXPLAIN " BORROWED FUNDS " AND ITS TYPE? ALSO EXPLAIN THE MERITS AND DEMERITS?
Borrowed funds refers to those funds that are generated through loans and borrowings. For example, loans from commercial banks and other financial institutions are sources of borrowed funds. Funds from such sources can be raised for a specific time period and have to be repaid once the time period expires. Borrowed funds also command an interest rate that has to be paid by the borrower along with the principle amount. Moreover, such fund are provided against the security of a fixed asset by the business. Borrowed funds can be of the following types.
- Debentures
- Loans from Commercial Banks
- Loans from Financial Institutions
- Public Deposits
- Lease Financing
- Commercial Papers
Borrowed funds involve the following merits and demerits.
Merits
The following are some of the merits of borrowed funds.
- The lender of the funds does not command any control over the business.
- As the interest rate on the loan is fixed, the charge on the profits of the business also remains fixed.
- When funds are raised through borrowings, the control of the owner over the management remains unaffected.
- It is a flexible source of funds as the amount of loan can be conveniently adjusted as per the requirement. For example, loan can be repaid when the funds are not required.
Demerits
The following are some of the demerits of borrowed funds.
- Funds can be borrowed only against a certain asset or security.
- It is stringent in the sense that the loan amount and the interest must be repaid at specific intervals irrespective of whether the business earns profits or faces loss.
- Default on repayment of borrowed funds carries serious consequences.