Which is better - own funds or borrowed funds?

In carrying out economic activities, each 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.

The borrowed capital means the funds attracted (bank credit, commodity credit, financial leasing, issue or other values), on a returnable basis, through which the enterprise is financed. 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 they belong to the enterprise as property and are used for its development. They have a higher opportunity to generate profits 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. TO External are: the authorized capital (the amount of funds provided by the owners to carry out activities); Gratuitous financial assistance to the enterprise; Attraction of share or equity additional capital , etc.

The structure of internal sources includes: profit, remained at the enterprise; Depreciation and so on.

High performance of the enterprise depends on the structure of the used capital. 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 uses only its own funds, then it has great financial stability. However, the same 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 funds has a great potential for its development and an opportunity for an increase in profitability, but it largely generates financial risk and bankruptcy, which increase with the increase in the share of funds attracted to the total mass of capital.

In practice, you can make sure that there is no 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.