Explain the following term/concept.
1. Borrowed Capital
(a) Borrowed capital is that capital that is borrowed from creditors. It is also known as debt capital. Interest has to be paid on borrowed capital whether the company makes a profit or not.
(b) The company borrows capital when the owned capital is not sufficient. The company can raise borrowed capital in the form of: Debentures, Public Deposits, Bonds, etc.
2. Owned capital
(a) The capital raised by the company with the help of owners (shareholders) is called owned capital or ownership capital. Owned capital is regarded as permanent capital, as it is returned only at the time of winding up of the company.
(b) Owned capital can be raised in the form of Shares, i.e, Equity and Preference Shares, and Retain Earning.
3. Ploughing back of profit
(a) Retained earnings are the earnings of the company which are retained (reinvested) in the business. The sum of those profits accumulated over years is re-invested in the business, rather than distributing it as a dividend to shareholders.
(b) It is the simple and cheapest method of raising funds. It is an important source of internal financing. Thus, it is also known as ‘Self Financing’ or ‘Ploughing Back of Profits’.
(a) An overdraft implies only to the existing current account holder. Therefore, it is a credit facility granted by a bank to current account holders. Under an overdraft facility, the bank allows its customer to overdraw an amount, up to a particular limit, i.e. to withdraw more than the amount of credit balance in his current account.
(b) Generally, a low rate of interest is charged by bank, and collateral securities usually accepted for an overdraft facility.
5. Trade credit
(a) Trade Credit refers to the facilities or credit extended by the manufacturer, wholesalers, and suppliers of goods to the purchaser but receives payment after the credit period from the date of purchase. Manufacturers, wholesalers, and suppliers of goods or materials are called Trade Creditors’.
(b) This practice is done by a business concern with an intention to increase its sales or turnover, generate additional business and maintain good relations with the purchasers.