Question

Explain four advantages of raising funds from commercial banks.

Answer 1

1. Raising funds from commercial banks is available for a specified period, which helps businesses plan their financing needs effectively.
2. It provides the benefit of trading on equity, as interest on loans is fixed, and any additional profits earned by the business increase the returns to shareholders.
3. Repayment can be made out of future earnings, reducing the immediate financial burden on the business.
4. Interest paid on bank loans is deductible when calculating taxable profits, reducing the organisation’s overall tax liability.
5. A business can choose a bank that offers favourable loan terms and conditions.