a business organization requires both long term and short term capital which can either be on the form of ownership capital and borrowed capital." Comment upon the statement with hypothetical example.
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to run a business capital is required both for the long-term and short-term.
Long term capital is formed of ownership capital (equity) and long-term debt(borrowed for more than 1 year). Both these funds are huge liabilities to the firm. Long-term debt financially has cost in terms of interest whereas as to raise equity ownership of the company has to be sacrificed. Therefore long-term loan may be very necessary for running a organization but comes with huge disadvantages.
Short term loans may not cost much but are very risky. They should meet the cash flow of the company. For example if the company doesn't get its inflow when it is liable to pay its creditors it actually gets into huge trouble.
Both have their advantages and disadvantages thus a good combination of both is required in order for better running of the organization.
Long term capital is formed of ownership capital (equity) and long-term debt(borrowed for more than 1 year). Both these funds are huge liabilities to the firm. Long-term debt financially has cost in terms of interest whereas as to raise equity ownership of the company has to be sacrificed. Therefore long-term loan may be very necessary for running a organization but comes with huge disadvantages.
Short term loans may not cost much but are very risky. They should meet the cash flow of the company. For example if the company doesn't get its inflow when it is liable to pay its creditors it actually gets into huge trouble.
Both have their advantages and disadvantages thus a good combination of both is required in order for better running of the organization.
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