Business Studies

BORROWED FUND
BORROWED FUND
Trade Credit (Borrowed Fund----Short Term
Finance)
• Trade credit is a business-to-business (B2B)
agreement in which a customer can purchase goods
without paying cash up front, and paying the supplier
at a later scheduled date. Usually, businesses that
operate with trade credits will give buyers 30, 60, or
90 days to pay, with the transaction recorded through
an invoice.

• Trade credit can be thought of as a type of 0%

financing, increasing a company’s assets while
deferring payment for a specified value of goods or
services to some time in the future and requiring no
interest to be paid in relation to the repayment period.
Understanding Trade Credit

• Trade credit is an advantage for a buyer. In some

cases, certain buyers may be able to negotiate
longer trade credit repayment terms, which
provides an even greater advantage. Often,
sellers will have specific criteria for qualifying for
trade credit.
A B2B trade credit can help a business to obtain, manufacture,
and sell goods before ever having to pay for them. This allows
businesses to receive a revenue stream that can retroactively
cover costs of goods sold. Walmart is one of the biggest
utilizers of trade credit, seeking to pay retroactively for
inventory sold in their stores. International business deals also
involve trade credit terms. In general, if trade credit is offered
to a buyer it typically always provides an advantage for a
company’s cash flow.
The number of days for which a credit is given is determined by the
company allowing the credit and is agreed upon by both the
company allowing the credit and the company receiving it. Trade
credit can also be an essential way for businesses to finance short-
term growth. Because trade credit is a form of credit with no
interest, it can often be used to encourage sales.

Since trade credit puts suppliers at somewhat of a disadvantage,

many suppliers use discounts when trade credits are involved to
encourage early payments. A supplier may give a discount if a
customer pays within a certain number of days before the due date.
For example, a 2% discount if payment is received within 10 days of
issuing a 30-day credit. This discount would be referred to as 2%/10
net 30 or simply just 2/10 net 30.
Features of Trade Credit

• 1. There are no formal legal

instruments/acknowledgements of debt.

• 2. It is an internal arrangement between the buyer and

seller.

• 3. It is a spontaneous source of financing.

• 4. It is an expensive source of finance, if payment is not

made within the discount period
Public Deposits(Borrowed Fund- Medium-
Term Finance

• A company can accept deposits from the public to

finance its medium- and short-term requirements of
funds. This source has become very popular off late
because companies offer higher interest than the
interest offered by banks.
Features of Public Deposits

• The following are the features of public deposit:

• 1. Total public deposits cannot exceed 25 per cent of

the paid up capital and free reserves of the company.

• 2. It is an uncertain source of financing.

• 3. There are legal restrictions on the acceptance and

renewal of public deposits.
Debentures/Bond (Borrowed Fund- Long-
Term Source of Finance)

• A debenture bond is a bond that is not secured by any

assets of the issuer. Instead, the bond is only backed
by the reputation and integrity of the issuer. This type
of bond typically carries a higher rate of interest than
a secured bond, to compensate investors for the
increased risk of not having their funds repaid.
Features of Debentures

• Promise-
• It is a written promise by the issuing company that owes the
specified money to the holder.

• Face Value-
• The face value of debenture is generally the high denomination of
Rs.100 or in the multiples of Rs.100

• Time of Repayment-
• It is a debt instrument that the company issues with a maturity date
mentioned in the certificate. Basically, it provides the time of
repayment of the principal amount and interest on the maturity date.
• Interest rate-
• The holders receive a fixed rate of interest payment
periodically, either half-yearly or annually. The rate of
interest of this instrument varies depending on the
company, the current market conditions and the nature of
business operations.

• Assurance of repayment-
• As per the deed, this long term debt instrument carries an
assurance of repayment on the specified due date. Also,
they can be redeemed at par, premium or discount.

• Parties to Debenture-
• Company – is the entity that borrows money.

• Trustee –
• The party through which the company deals with the
holders. The company creates an agreement between
trustees and holders known as ‘Trust Deed’. This deed
consists of company obligations, rights of holders, etc.
Difference Between Shares and Debentures

Shares Debentures
• What it means? • What it means?

• Shares are the company-owned capital
• Holder
• The person who holds the ownership of
the shares is called as Shareholders.
• Debentures are the borrowed capital
of the company
• Holder
• The person who holds the ownership of
the Debentures is called as Debenture
holders.
Shares Debentures

• Status • Status

• Owners • Creditors

• Mode or return • Mode or return

• Shareholders are given the • Whereas, debenture holders

dividends. are given intrest.

• Payment of return • Payment of return

• Dividends can be paid to the • Interest can be paid to the

shareholders out of profits debenture holders, regardless
earned by the company. of if the company has earned
profits.
Commercial Bank

• The term commercial bank refers to a financial

institution that accepts deposits, offers checking
account services, makes various loans, and offers
basic financial products like certificates of deposit
(CDs) and savings accounts to individuals and small
businesses.
 Features of Commercial Bank

• Fund are generally available for shorter period.

• Bank make detailed investigation for the company affairs and
financial structure before issue of loan.
• It is very flexible source as loan amount can be increased as well
as decreased.
• In some cases, banks may put restriction and difficult terms and
condition.
Difference between public deposit and loan from
commercial bank
Public Deposits
• No security required
• Public deposits are available
for a period of 3 years.
• Suitable source of finance.
• There is no secrecy.
Loan from Commercial
bank
• Bank loan generally requires
security
• Bank deposits are available for
short and medium term.
• Suitable for all enterprise.
• Secrecy about bank loan can be
maintained
Financial institutions

A financial institution (FI) is a company engaged in the

business of dealing with financial and monetary
transactions such as deposits, loans, investments, and
currency exchange. Financial institutions encompass a
broad range of business operations within the financial
services sector including banks, trust companies,
insurance companies, brokerage firms, and investment
dealers.
Features of financial institutions

• Long-term Finance.
• Managerial Advice.
• Medium and long-term Finance.
• Subscribers of securities.
• Underwriters.
• Guarantee loan.
• Loan in Foreign Currency.
Inter-Corporate Deposits [(ICD)]

An Inter-Corporate Deposit (ICD) is an unsecured borrowing

by corporates and FIs from other corporate entities registered
under the Companies Act 1956. The corporate having surplus
funds would lend to another corporate in need of funds.
Features of ICD

• Not suitable for Long-Term finance.

• Higher rate of Interest of bank.
• High Risk as ICD are unsecured deposits.
• Free from Bureautic and legal problems.