Which is better - own funds or borrowed funds?
Carrying out economic activities, eachan enterprise must have capital to invest in the formation of assets. It includes the total value of all funds in tangible and intangible form. The multidimensionality of the concept of "capital" is characterized by dozens of definitions, but in this case, types of capital will be considered according to the ownership of the enterprise, which allocate their own funds and borrowed funds.
Borrowed capital means attractedcash (bank loan, commodity loan, financial leasing, issue or other values), on a return basis, through which the financing of the enterprise. All of its forms are financial obligations that the company must pay off on time. By the validity period they can be short-term - up to a year, and long-term - more than a year.
Own funds are characterized by the fact that theybelong to the enterprise as property and are used for its development. They have a higher opportunity to generate profit in any area of activity, because they do not need to pay interest on loans. Assets formed at their expense are net assets of the company, which ensures its financial stability.
The main sources of own funds are external and internal. TOexternal are: authorized capital (amount of funds provided by owners for the performance of activities); gratuitous financial assistance to the enterprise; attraction of share or joint-stock additional capital, etc.
The structure of internal sources includes: the profit which has remained at the enterprise; depreciation and so on.
High performance of the enterprisedepend on the structure of the capital used. This structure is the ratio of own and borrowed funds involved in the process, and affects the return on assets, stability, and solvency of the enterprise, as well as determines the ratio of the degree of risk, and profitability during the development of the firm.
Therefore, if the company only usesown funds, then it has great financial stability. However, in the same way, it limits the rate of its growth, not being able to form an additional volume of assets, and not using the increase in profit on the invested funds.
An enterprise that uses only borrowed fundsmeans, has a great potential for its development and the possibility of an increase in profitability, but this largely generates financial risk and bankruptcy, which increase with the increase in the proportion of funds attracted to the total mass of capital.
In practice, you can make sure that there is noA single recipe for how to use your own funds and borrowed funds. Nevertheless, there are a number of factors, considering which, it is possible to purposefully form the structure, providing the necessary conditions for the effective operation of the enterprise.