CHAPTER-8 }F BUSINESS FU (inance is the life blood of the business. The requirements of funds by business to carry out its ‘various activities are called business finance) ‘Claseification af & cr ‘On the basis of Period ‘L.Long-term finance; Funds invested in the business for a long period (exceeding 5 years) -for procuring, fixed assets such as land building, etc.) 2, Short-term finance; (period not exceeding one year - 10 meet day to day expense - to pay wages etc.) ‘3. Medium-term finance:( for a period between 1 t0 5 ‘years — used for modernization of plant & machinery, introduction of anew product etc..) in i ners 1 Owner's Funds: (amount contributed by owners and profits reinvested in the business) 2, Borrowed Funds. (funds raised by way of issue of ‘debentures, raising through public deposits and from financial institutions ) nth f Sou f generation: 1. Internal sourcer(generated from within the business) 2.Extemal source:(generated from outside the business) Sources of Finance retained in the business for future use -source of internal financing ) /Merits:(permanent source of fund -does not involve any ‘cost -greater flexibility -helps to face the unexpected losses) ‘Demerits:(create dissatisfaction among the existing shareholders -uncertain source of finance - chance of misuse of funds) 2. Trade Credit; (credit given by one trader to ‘another for the purchase of goods and services) /Merits:(convenient source -Easily available helps to increase the inventory level -does not create any charge ‘on the assets) ‘Demerits:(Iead to over trading -There isa limit for this source costly source of fund ) ‘factor’ renders various services such as discounting of bills, collection of ‘clients debts -charges fees } /Merits:(Cheaper source — to meet liabilities flexible - {does not create charge on assets- clients can concentrate ‘on other areas of business) Demerits:(expensive -Higher interest cost -customer ‘may not feel comforcable with factor) ‘owner of the assets-(Iessor) &e lessee-(who use the assets) -Lessor give the right to use the asset in return fora periodical payment (lease rental) ‘Merits:(use the assets with a lower investment ~easier to finance -tax deductible expense- does not affect the ownership and control of the firm) ‘Demerits:(restriction to use the assets -business may be| affected in case the lease is not renewed -higher payout obligation @ premature termination) 'S. Public Deposits: (deposit raised by the firms directly from the public) Merits:(simple procedure -lower cost of borrowings - does not create any charge on the assets -control of the company is not diluted) Demerits: (dificult for new companies -unreliable source - Its collection is difficult) 6.4 er (CP); ( unsecured promissory note -period 90 days to 364 days) Merits:(unsecure -freely transferable -high Tig continuous source of fund -Low cost of issue) Demerits:(Only high reputed & financially sound company can issue -Collection of fund may difficult - Extending the maturity is not possible) 7. Commercal Banks Banke provides loans to the firms of all sizes) Merits:(timely assistance -Secrecy can be maintained -easier source of finance -flexible source) Demerits:(Funds available for short periods -Security needed -Procedure is difficult) al Institutions: There are number of financial institutions which provide finance to business,eg:IDBI } capital obtained by issue of shares is known as share capital) Kinds of shares : a, Preference shares:(carry preferential rights -get a fixed rate of dividend before paid to equity shareholders -prior claim in payment of capital on winding up of co) Merits:(Fixed rate of return -safety of investment ~ provide long-term capital -Management & control is not diluted -Security is not needed) Demerits:(Fixed dividend is paid -Shareholders have no control over management -No voting right except under certain conditions -No assured return ) b. Equity shares : Shares without any preferential right in payment of dividend or repayment of capital) Merits:(No obligation to pay fixed dividend -No security is needed -permanent capital - real owners of the company -They have voting right) Demerits:(cost of equity is high -leads to speculation -less attractive to investors who prefer fixed income More legal formalities) esi(issued by a company under its seal to acknowledige its debt ~creditor ship security) /Meerits:(Control not affected -tax deductible -redeemed at any time -get fixed rate of interest -secutty to investors) ‘Demerits:(borrowing capacity willbe reduced. -Fixed rate of return isa burden oo the co. -No voting rightrepad afer specific period even ifthe company face financial dffculy..) International Financing:(Commercial Banks - International Agencies & Development Banks eg: EXIM Bank and ADB -FDI (Foreign Direct Investment: direct ‘subscription to the equity capital of an Indian company by ‘a multinational corporation) ty f BR (cost of procurement & utilizing the fund -Financial strength && stability of operation -Form of business & legal status. Purpose of the fund and time period -Risk profile ease of obtaining funds -Tax benefits) Prepared by ANFAS .V.S , HSST Commerce, Thrissur