Sources of Borrowed Capital

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Sources of Borrowed Capital

Only owned capital is insufficient to carry on all business activities of a joint stock company. A company needs borrowed capital to supplement its owned capital. Every trading company is entitled to borrow money. However, having an express provision in the Memorandum of Association is a standard practice, enabling a company to borrow money. The memorandum authorises the company to exercise borrowing powers, whereas the Articles of Association provides how and by whom these powers shall be exercised. The company's Board of Directors usually exercises the power to borrow money.

A private company may exercise its borrowing powers immediately after incorporation. However, the public company cannot exercise its borrowing power until it secures a certificate of commencement of business.
The capital may be borrowed for short, medium or long-term requirements. It is better to raise borrowed capital at a later stage of the company’s business when it wants to expand or diversify its business and requires additional capital. This additional capital can be raised by: a) issue of debentures, b) Accepting deposits, c) bonds, d) Loans from commercial banks and Financial institutions, etc. Interest is paid on borrowed capital. It is paid at a fixed rate. Borrowed capital is repayable after a specified time.

Sources of Borrowed Capital

  1. Debentures
  2. Acceptance of Deposit
  3. Bond
  4. American Depository Receipt (ADR) and Global Depository Receipt (GDR)
  5. Commercial Banks
  6. Financial Institutions
  7. Trade Credit

 

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