Creditor’s funds are available at easy rates than the owner’s funds. The creditors generally agree to receive a lower rate of interest. But on the other side, the owner’s demand for more protection and security of their capital invested.
Creditors have no right to participate in the activities of the business to which they are advancing funds. So owners may utilize the number of creditors for the best interest of their business. But the desired position may not be maintained in case of admitting new owners in the enterprise.
Creditor’s funds are considered best for small businessmen who cannot afford the risk of additional ownership due to some administrative and economic factors. So the creditor’s funds are available as the source of additional fund.
There is a great element of flexibility in creditor’s funds because it may be increased in the closing period of seasonal industries when the owner’s funds may not easily be available.
The government imposes the taxes on income after deduction of interest of loans. If there is a share of profit paid to a creditor, it will be deducted in the calculation of income tax. It thus enables the owners to achieve the economy of income tax.
It is very convenient to purchase all goods on credit basis instead of paying cash on or before delivery. It is also possible to create the accrued wages, salaries advertising and interest for the payment in a future date.
Short term credit is available at simple terms and condition than long term financing. The borrowers pay a lower rate of interest plus other charges in regard to the amount of credit.
It is convenient for creditors to advance funds for a few months than long term funds. As its period is very short, so there are fewer chances of change in the credit standing of the borrower, on account of certain circumstances.
This type of finance is more flexible than other terms of finance. This fund may be secured at the time of need. The repayment of this loan is genera1.1y made after fulfilment of the requirement.
It may happen true that the rate of interest charged by the lenders is higher than long term financing. Therefore short term financing may be costly due to various economic and business factors.
This type of loans must be paid at frequent maturity. In case of delay or default, the business can suffer but this situation may not arise in ownership funds due to the absence of maturity.