Borrowed Funds

These are provided through borrowings and loans. These funds are available on certain terms and conditions for a specific period after which these are to be returned. these are risky source of funds as these involve the payment of interest at a certain rate and repayment of principal amount as per the contract, which is to be paid even if there are losses in the business.

Some of the examples for borrowed funds are:
trade credit: it is a spontaneous source of fund that is available in normal course without much formalities. It is available in the form of goods supplied on credit by the suppliers or services provided on credit by the providers of services. It does not involve any explicit cost in the form of payment of interest but generally a higher price is charged for goods and services when these are provided on credit. It is generally available for a short period of up to 90 days.

Factoring: it involves sale of receivables arising from credit sale of goods or services to factors that is a person. As a result, enterprises get the funds immediately and need not wait till the due date for the receipt of payment. Moreover, they are free from the tasks of collection of payment as the factor becomes responsible for the entire credit control and debt collection from the buyer.

Lease financing: it is taking a fixed asset on rent. Lease is a contract by which the owner of the asset permits the other party to use the asset for a periodic payment. At the end of the lease period, the asset is returned to the lessor. This method is more suitable to get assets such as computers and electronic equipment which become obsolete quickly because of fast technological developments.

Public deposits: these are the deposits that are raised by the organsation directly from the public. Rates of interest offered on these deposits are higher than those for bank deposits. This is the reason why the public are interested in these deposits.

Debentures: they are issued by companies to raise long term funds at a particular rate of interest for a specified period of time, after which these are to be redeemed.

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