Difference between Owner’s Funds and Borrowed Funds

Owner’s Funds

The Owner’s Funds are the total amount invested by the owner of an enterprise and the accumulated profits that they have reinvested in the business. This money remains invested in the business till the company winds up its operations. It is the primary source of funds, without which it is difficult for any organisation to survive in the market. The owner may be an individual, a group of partners or shareholders in the business. The capital invested by the owner/s allows them control over their business. Some entrepreneurs may prefer to keep the control of the company to themselves, while others may opt for sharing the control and risk of a business by bringing in other investors.

Borrowed Funds

The Borrowed Funds are the funds that a business raises through loans or borrowings from other parties. They are the most common sources of capital for any enterprise. Some of the methods of raising Borrowed Funds are as follows:

  • Raising loans from commercial banks or other financial institutions
  • Issuing of debentures and bonds
  • Public deposits
  • Trade Credit

The creditors provide these funds only for a specified period of time, and they have to return after the expiry of that period. A business can avail these funds only under certain terms and conditions, which they need to fulfil at all costs. The borrowers must also pay a fixed amount of interest on these funds to the lenders, irrespective of whether the firm is making a profit or not. The creditors give these funds on the security of assets of the firm in most cases.

Differences between Owner’s Funds and Borrowed Funds

Some of the significant differences between Owner’s Funds and Borrowed Funds are as follows:

Owner’s Funds

Borrowed Funds

Definition

The Owner’s Funds are the total amount invested by the owner of an enterprise and the accumulated profits that they have reinvested in the business.

The Borrowed Funds are the funds that a business raises through loans or borrowings from outside parties.

Source of Investment

The Owner’s Fund is a permanent source of investment for a business that remains with the company till it winds up its operations.

The Borrowed Fund is a temporary source of investment for a business that is paid back to the creditors after the completion of a specific period of time.

Control

The control of the enterprise rests with the individuals or entities that provide the capital for the business.

The providers of Borrowed Funds do not get any stake in the control of the enterprise by providing funds.

Returns

The returns on these funds may fluctuate on a yearly basis based on the profits that a business earns from its operations.

The creditors get a fixed rate of interest on the funds provided by them on a periodic basis.

Security

The Owner’s Funds are not backed by any security of any asset.

The Borrowed Funds are backed by the security of assets.

Reward

The reward for Owner’s Funds is the dividend that they get at the end of a year.

The reward for borrowers funds is the fixed rate of interest that they get at the end of a year.

Priority

The owners get second priority in terms of return of capital. The dividend on the Owner’s Fund is paid only after the payment of interest on the Borrowed Funds.

The borrowers get first priority in terms of return of capital. The interest on the Borrowed Funds gets paid before the payment of dividend on the Owner’s Funds.

Conclusion

In spite of major differences between Owner’s Funds and Borrowed Funds, both of them are major sources of capital for any business. Both these sources of capital have their own risks and rewards, but no enterprise can survive without access to these funds.

Also See:

Leave a Comment

Your Mobile number and Email id will not be published.

*

*