Loan Capital

Loan Capital That part of the finance of a company which is subscribed as a loan for a number of years at a fixed rate of interest, e.g, debentures. This is usually secured against the company’s assets. Subscribes to loan capital are not members of the company, as equity shareholders are, and they have no say in the company’s policy, as equity shareholders have. The advantage of loan capital is that is can be repaid when the company has funds, and the interest charges are deductible for tax purposes. Also, under conditions of industrial prosperity, a company which has a large loan component in its capital tends to give better returns on the equity capital, as the profit after interest charges have been met is subject to a lower tax, yielding a higher net profit. See LEVERAGE

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