Santosh Stores purchased goods from Surabhi Stores for Rs. 5,00,000 which will be repaid after a
period of 3 months.
Identify the source of finance discussed here and explain two merits and two limitations of this source.
Answers
First whh santoosh take material from store and why he repaid after 3 month
Answer:
Explanation:
the source of finance is DEBT
Advantages
1. Retain control. When you agree to debt financing from a lending institution, the lender has no say in how you manage your company. You make all the decisions. The business relationship ends once you have repaid the loan in full.
2. Tax advantage. The amount you pay in interest is tax deductible, effectively reducing your net obligation.
Disadvantages
Debt financing has its limitations and drawbacks.
1. Qualification requirements. You need a good enough credit rating to receive financing.
2. Discipline. You’ll need to have the financial discipline to make repayments on time. Exercise restraint and use good financial judgment when you use debt. A business that is overly dependent on debt could be seen as ‘high risk’ by potential investors, and that could limit access to equity financing at some point.