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Question
Explain the pros and cons of public deposits as a source of business finance.
Solution
The pros of public deposits are as follows:
- Obtaining deposits is simple and free of the restrictive requirements typically found in lending agreements.
- The cost of public deposits is generally lower than the cost of borrowing from banks and financial institutions.
- Public deposits normally do not generate a levy on the company's assets. The assets can serve as collateral for obtaining loans from other sources.
- Depositors do not have voting rights; hence, the company's control is not diluted.
The cons of public deposits are as follows:
- New enterprises usually struggle to raise cash through public deposits.
- The public may not respond to a company's financial requirements, making it an unreliable source of funding.
- Collecting public deposits can be problematic, especially for big amounts.
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