Borrowings and their types

A company needs adequate financial arrangements to carry on its business operations. Primarily a company has two options before it raises capital. One is to issue shares to the public and get funds in exchange and the second is to borrow money either by issuing debentures or taking loans from banks or financial institutions. The lenders and the shareholders have to be paid interest and dividends respectively against the funds provided by them.

Although it is not mandatory for a company to pay dividends to its shareholders, except on preference shares, it shall on the other hand be bound to repay the amount borrowed, in the form of interest as per the terms of borrowings agreed between the company and the lenders. The task of borrowing money on behalf of the company is usually delegated to the Board of Directors. The Board is however empowered to borrow such money up to the limit prescribed under the Companies Act of 2013, especially in the case of public companies. Private Companies are not expected to comply with such borrowing limits.  

The Borrowings made by a company can broadly be divided into two categories, namely, ultra vires borrowings and intra vires borrowings outside the scope of the Board of Directors. The former means when a company borrows beyond the limit prescribed by its Articles of Association whereas the latter means where the Board of Directors borrow in excess of the limit prescribed by law but such amount is within the borrowing limit of the company.

Ultra vires borrowings are void in nature and cannot be ratified later by way of passing a resolution for the purpose in the company’s general meeting.

On the contrary, intra vires borrowings beyond the scope of the Board of Directors can be ratified by the company.

We shall now understand more such types of borrowings further in detail

1) Long term Borrowings:

 -The borrowings made for a period of 5 years or more are called long-term borrowings.

 - Such types of borrowings are made for financing a big project or for making a big capital investment by the company.

- A long-term borrowing is generally made by creating a charge on the fixed assets of a company.

2) Medium-term Borrowings:

- The borrowings made for a period ranging from 2 years to 5 years are called medium-term borrowings.

- The funds lent as medium-term borrowings are advanced by commercial banks for the purchase of machinery, vehicles, land, etc.

3) Short-Term Borrowings:

- Funds borrowed for a period of up to 1 year or less than 1 year are called short-term borrowings.

- Such borrowings are generally made by the company, to fulfill its working capital needs.  

- Short- term borrowings are made by hypothecating stocks and debtors.

4) Secured Borrowings:

If creditors have recourse (i.e access or claim) to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company, then the borrowings made from such creditors are called secured borrowings.

5) Unsecured Borrowings:

When the creditors do not have recourse to the company’s assets to discharge their claims, then such form of borrowings made from the creditors is called unsecured borrowings.

6) Syndicated Borrowings:

Under this type of borrowing, a group of lenders provides loans under a common loan agreement and common terms and conditions.

This borrowing facility is commonly availed for large and sophisticated borrowings made by the company.

7)  Bilateral Borrowings:

The borrowings made from a particular bank or financial institution under a single borrowing contract, are called bilateral borrowings.

8) Private Borrowings:

Borrowings made from a bank or financial institutions are called private borrowings.

9) Public Borrowings:

Such types of borrowings cover all debt instruments that can be traded freely through a public exchange or over the exchange. (e.g bonds and debentures)

 This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.