The disadvantages are:
1) Uncertainty: in order for a company to attract public to deposit their savings, it should have a credit rating that is high. Certain financial problems may arise from sudden deposits withdrawals.
2) Lack of security: there are no charges on the concerned assets by the public. Therefore, there is a risk in depositing savings with a company that is not very sound.
3) Obstruction of capital-market growth: lack of capital-market growth deprives the investor and the company good security benefits. This comes from more and more incoming deposits with the company hence less security investment.
4) Over–capitalization: this source of finance may lead to raising of more currency than is needed. This will lead a company to get involved in speculative activities or may be unable to put the funds to best use.
The fifth long-term source is, borrowing from banks. This involves acquiring of loans from banks and financial institutions. Lending between a bank and organization is dependent on trust and understanding amongst the two. Banks give loans for more than a year. Banks give funds to small-scale units.
Long-term borrowing from banks has some merits:
1) Flexible in nature this is seen when loans are repaid when the need is met.
2) Availability of finance for a definite period thus no burden.
3) Secrecy by banks on its clients’ financial operations.
4) Saves time and cost compared to shares and debentures.
5) No interference of internal affairs by the bank hence company control is retained by management.
Demerits of borrowing from banks are as follows:
1) When borrowing, personal guarantee or assets pledge is required, and an organization cannot raise more loans on these assets. ...Show more