Q.Distinguish between Owned Funds and Borrowed Funds.

This distinction is the foundation on which the rest of the AP Intermediate Commerce chapter on sources of finance is built.

Control, risk and repayment obligation differ sharply between the two.

Owned funds and borrowed funds differ in several important respects, which an AP Intermediate Commerce student should be able to lay out clearly.

Regarding source, owned funds come from the proprietors, partners or shareholders of the business, while borrowed funds come from outside lenders such as debenture holders, banks and depositors. Regarding payment obligation, owned funds carry no fixed obligation to pay a yearly return — dividend is paid only if profit is earned and the board decides to distribute it — whereas borrowed funds carry a fixed obligation to pay interest regardless of whether the business makes a profit.

Regarding repayment, owned funds (other than redeemable preference shares) are not repayable during the normal life of the business, while borrowed funds must ordinarily be repaid on or by an agreed date. Regarding control, owned funds (mainly equity) usually carry voting rights and a say in management, whereas borrowed funds give the lender no voice in how the business is run, though lenders may impose conditions to protect their money. Regarding risk, a business with a larger proportion of owned funds carries lower financial risk, since it has no compulsory yearly charge to meet, while heavy reliance on borrowed funds raises financial risk.