A company is started by the owner and no company can run without funds, as an owner of the company you have two choices one is to do business with borrowed capital and the other option is to have your own funds or owner’s funds. Owner’s funds refer to those funds which are invested by the owner of the company and remain in the company as long as the company is running, apart from capital accumulated profits are also a part of the owners funds. In order to get a better idea about this concept, one should look at some of the advantages and disadvantages of owners funds –
Advantages of Owners Funds
Owners Funds Has Permanency
The first and foremost advantage of owners funds is that it is a permanent source of capital because unlike borrowed capital which has to be repaid within a stipulated period of time in the case of owners funds there is no such thing as this capital will remain invested in the company as long as the company is running thus there is no scope of business getting affected due to capital being withdrawn from the company.
Better Control
Another benefit of owners fund is that the owners have better control over the management of the company because in case of borrowed capital the borrowers and equity capital the shareholders put many restrictions regarding the use of capital which in a way hampers the way the owner of the company wants to run the business leading to problem and frustration for the owner while running the business. In simple words suppose you take your friends car to the highway and your friend ask you to handle that car carefully by putting restrictions like driving carefully at slow speed, checking engines and tires regularly and so on then it will result in you not enjoying the ride as in your back of mind safety of car will of paramount importance and not the driving experience same is the case with borrowed capital where owners concern is repayment of borrowed capital and not the business itself.
No Obligatory Payment
In the case of owner’s funds, it is not compulsory to pay any interest or dividend to the owner which is the case with borrowed capital or equity capital. In case of the company doing well, all interest payment does not hurt but when the company is in crises all these interest payments hurt the company and can even lead to bankruptcy of the company. In simple words, in the case of owners’ funds, the owner can afford to have 1 or 2 bad years but in the case of borrowed capital there is no such scope as any delay in payment of interest or capital can lead to the borrower taking action against the company.
Disadvantages of Owners Funds
Lack of Leverage
The biggest drawback of owners funds is the lack of leverage because owners are not a god in the sense that they do not have access to unlimited capital which they can put in the company rather their sources are limited and if the company wants to become big then it has to take the help of borrowers so that they can leverage those funds and become big as in case of borrowed capital if the owners can put that capital to good use than interest payment will look like peanuts in comparison to the return earn from that capital.
Owners Funds Leads to Complacency
Another limitation of owners funds is that it can lead to complacency in the mind of the owners of the company because when you are using borrowed capital for running of the business then you are on your toes because of interest payment and repayment of capital to the borrowers which is not the case with owners funds where there is no such obligation leading to complacency creeping in the mind of the owner which in the long run will hamper the growth of the company as no company can be successful if owners are complacent.
Loss of Opportunities
In the case of owner’s funds since the supply of capital will be limited the owners will be focussing on only those opportunities or businesses which can be completed with owners funds and leaving other profitable opportunities or businesses which can help the company in becoming big. In simple words if you tie a lion with a chain then the lion will be like a pet animal in the same way owners fund is like a chain that does not allow the owner to think big and take risks leading to the owner not taking big risks and thus foregoing the opportunity of the company becoming big.
As one can see from the above that owner’s funds have pros as well as cons and that is the reason why any company thinking of using only owners funds for capital should carefully read the above points and then only should take any decision regarding the use of owners funds for running the company.