sources of business

finance

CLASS 11
BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE

Business finance refers to the requirements of funds by business to

carry out its various activities
"Finance is the blood for the Body of business".
Need for finance

Fixed capital Growth &

requirements Expansion
Working capital
requirement

Sources of finance (on the basis of ownership)

Owner's fund Borrowers fund

Contributed by owners Loans /credit

No liability to pay back Liability to pay

Permanent capital

CLASS 11 BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE
Sources of owners Fund

Equity shares Retained earning

Preference shares

1. Equity Shares (long term finance)

"Shares are the smallest unit in which the share capital of a
company is divided"
Equity shares are the most important and most common source of
raising long term finance.
Equity shareholders does not get a fixed dividend (Share of profit)
but are paid on the basis of earning by the company.

Features
Source of permanent capital (No fixed liability to return or to pay
divided)
Primary risk bearer (if company suffers loss, they bears it as they
were the last to get paid)
Control {they have voting rights}
High profit (in case the company earns more)
Basis for loans (they improves credit worthiness)
Claim over residual income (They get share in the left-over income
of the company, ie.. after paying all dues)

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CLASS 11 BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE

2. Preference Shares (long term)

They are those shares who have preference over the payment of
dividend and repayment (in case of winding up)
They have fixed rate of Return

Features
Fixed Rate of Return
No voting Right
Hybrid security (Equity + Debentures)
Preferential right of Repayment)
Less risk (as fixed dividend is certained)

(3) Retained earning (use of firm saving)

Self financing or plouging Back of profit"
It refers to the amount of undestributed profits after making
payment of dividend & taxes

Features
Long & Medium term finance
Permanent source of fund
Freedom of use (as it is generated internally)
Provides support ( in case of funding crunch)
Source for risky investments

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CLASS 11 BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE
Sources of Borrowers fund

Trade credit Loan from Financial

institutions

Public Debentures
deposits

Commercial Inter corporate

banks deposits (ICD)

1. Trade credit (Short term)

"Credit given by one trader to another for the purchase of goods
& services"
Appears in the books with the name of "creditors"
The volume and period of credit allowed depends on the
reputation, volume of purchase and financial position of the
purchaser
Generally it ranges b/w 3 to 6 months

Features
Easily available
Flexible (no strict rules & regulation)
No floatation cost (ie ....cost of arranging finance)

FORMS OF MARKET (ECONOMICS)

CLASS 11 BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE
2. Public deposits (Medium term)
Deposits raised by the company directly from the public
Rate of Interest offered > that offered on Bank deposit
Company places an advertisement and any member can fill-up the
prescribed form and deposit money

Features
Un-secured [company does not mortgage any asset]
Medium term (6 month to 3 year]
Economical
Limited fund (P.D should not exceed 25% share capital & free
reserves)
Easy method (Just place an advertisement)

3. Debentures Bonds (long term)

It refers to an instrument of a company evidencing a debt ,which
bears a fixed rate of interest and the company promises to repay
them at a future date
Holder of Debentures are called as Debenture holders (creditors for
firm)
Most common source of "Borrowers fund"

Features
Borrowers fund
Fixed rate of interest
Repayment (on maturity)
No voting rights

CLASS 11 BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE

Trustee when large numbers of debentures are sold to general

public then usually a trustee is appointed, Trustee can be a Bank /
financial institution who is appointed to ensure that the borrowing
firm fulfill its contractual obligations

4. Commercial Bank (Short & Medium term)

Bank gives loans to all sizes of firms and also many ways,
like cash credit, overdraft, term loans, letter of credit etc.

Features
Flexible source
Generally short period
Restrictions on use of funds (by banks)
Asset mortgage (against fund)
Detailed instigation by Banks

5. Loan from financial institutions (long term)

Government has established a number of financial institution across
the country to supplement financial support required by the firms.
They provide financial assistance (both owned & loan find) and also
gives guidance to industries and Business enterprise
They are also known as lending institutions or development Bank

FREQUENCY DIAGRAM (STATISTICS)

CLASS 11 BUSINESS
 NOTES
SOURCES OF BUSINESS FINANCE
Features
Long term finance
Managerial advice
Provides owned fund also (invest in shares)
Underwriters (on public issue)
Loan in foreign current (to import)
in b/w firms
(6) Inter-corporate, deposits (Short term)
deposit made by one company with another company.
ie.....purchasing securities of the company, giving loans to other company
Types

3 months deposits call deposits

12% p.a. interest 10% intrest

6 months deposits

commonly used deposits can be withdrawn by

15% annual interest
to overcome short term lender by giving one
financial problem day notice

It is free from legal & Bureaucration

Features
Secrecy (not known by public)
Un secured (high risk)
Hight rate of return
Not for long term finance
Free from legal problems

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CLASS 11 BUSINESS
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SOURCES OF BUSINESS FINANCE CLASS 11
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