SOURCES OF

BUSINESS
FINANCE
DONE BY SOHAN, OM, HARSHIT AND SUBRAMANIAN
 TOPICS COVERED:

• LOANS FROM COMMERCIAL BANKS

• LOANS FROM PUBLIC DEPOSITS
 LOANS FROM COMMERCIAL BANKS

• COMMERCIAL BANKS ARE PROFIT-BASED INSTITUTIONS THAT OFFER

FINANCIAL PRODUCTS LIKE LOANS, AS WELL AS SERVICES LIKE DEPOSIT,
ELECTRONIC TRANSFER OF FUNDS, ETC. TO THEIR CUSTOMERS.
• COMMERCIAL BANKS HAVE A SIGNIFICANT ROLE IN A COUNTRY’S
ECONOMY AS THESE ORGANISATIONS FULFIL THE SHORT AND MID-TERM
FINANCIAL REQUIREMENTS OF INDUSTRIES.
 PRIMARY FUNCTIONS 

• 1. ACCEPTING DEPOSITS – COMMERCIAL BANKS ACCEPT DEPOSITS FROM

THEIR CUSTOMERS IN THE FORM OF SAVING, FIXED, AND CURRENT DEPOSITS. 
• 2. PROVIDING LOANS – ONE OF THE MAIN FUNCTIONS OF COMMERCIAL
BANKS IS PROVIDING CREDIT TO ORGANISATIONS AND INDIVIDUALS, AND
PROFIT FROM THE EARNED INTEREST. USUALLY, BANKS RETAIN A SMALL
RESERVE FOR THEIR EXPENSES WHILE OFFERING THE REMAINING AMOUNT
TO CUSTOMERS AS VARIOUS TYPES OF SHORT AND LONG-TERM CREDITS
• 3. CREDIT CREATION – A UNIQUE FUNCTION OF COMMERCIAL BANKS IS
CREDIT CREATION. INSTEAD OF OFFERING LIQUID CASH, BANKS CREATE A
LINE OF CREDIT AND TRANSFER THE LOAN TO A BUSINESS OR COMMERCIAL
BODY ALL AT ONCE.
 MERITS AND DEMERITS OF COMMERCIAL
BANKS:
MERIT
• BANKS PROVIDE TIMELY ASSISTANCE TO BUSINESS
BY PROVIDING FUNDS AS AND WHEN NEEDED BY IT.
• SECRECY OF BUSINESS CAN BE MAINTAINED AS THE
INFORMATION SUPPLIED TO THE BANK BY THE
BORROWERS IS KEPT CONFIDENTIAL
• LOAN FROM A BANK IS A FLEXIBLE SOURCE OF
FINANCE AS THE LOAN AMOUNT CAN BE INCREASED
ACCORDING TO BUSINESS NEEDS AND CAN BE
REPAID IN ADVANCE WHEN FUNDS ARE NOT NEEDED
DEMERIT
• FUNDS ARE GENERALLY AVAILABLE FOR SHORT PERIODS AND
ITS EXTENSION OR RENEWAL IS UNCERTAIN AND DIFFICULT
• A COMMERCIAL BANK ACCOUNT IS COSTLY THAN NORMAL
BANK ACCOUNTS. EVERY SERVICE AVAILED IS CHARGEABLE
LIKE PAYROLL SERVICES, CHECKING OR VERIFICATION OF
ANY INFORMATION
• BANK CHOICE IMPACTS THE BUSINESS AND TRANSFERS TO
OTHER BANKS IS TIME AND MONEY TAKING. HAVING AN
ACCOUNT IN COMMERCIAL BANKS PRIOR TO THE START OF
THE BUSINESS IMPACTS THE GROWTH.
 TYPES OF LOANS OFFERED BY
COMMERCIAL BANKS
THERE ARE SEVERAL TYPES OF LOANS ADVANCED BY COMMERCIAL BANKS TO
THEIR CLIENTS. THESE LOANS INCLUDE:
 1. BANK LOAN

• A BANK LOAN IS AN AMOUNT OF MONEY OFFERED BY A BANK TO A

BORROWER AT A DEFINED INTEREST RATE FOR A FIXED PERIOD. BEFORE
GRANTING A BANK LOAN TO A CLIENT, A BANK MUST OBTAIN SEVERAL
IMPORTANT DOCUMENTS TO VERIFY THAT THE BORROWER WILL PAY BACK
THE LOAN. THESE DOCUMENTS MAY INCLUDE COPIES OF IDENTITY, PROOF
OF INCOME, AND AUDITED FINANCIAL STATEMENTS IN THE CASE OF
CORPORATE CLIENTS.
• THE LOAN IS GRANTED AGAINST COLLATERAL THAT, IF THE CUSTOMER
DEFAULTS, THE BANK CAN SELL THEM TO RECOVER THE MONEY. THE
COLLATERAL MAY BE EQUIPMENT, MACHINERY, REAL ESTATE PROPERTY,
INVENTORY, DOCUMENTS OF OWNERSHIP, AND OTHER ITEMS.
 2. CASH CREDIT

• CASH CREDIT IS AN ARRANGEMENT BETWEEN THE BANK AND A CLIENT, AND IT

ALLOWS THE CLIENT TO WITHDRAW MONEY BEYOND THEIR ACCOUNT LIMIT.
THE CASH CREDIT IS ADVANCED FOR A PERIOD OF ONE YEAR, BUT IT MAY
EXTEND TO EVEN THREE YEARS IN SPECIAL CIRCUMSTANCES.
• THE AMOUNT IS DEPOSITED IN THE CURRENT ACCOUNT OF THE BORROWER AND
CAN BE WITHDRAWN THROUGH A CHEQUE. THE INTEREST CHARGED ON THE
CASH CREDIT DEPENDS ON THE AMOUNT OF MONEY AND THE DURATION FOR
WHICH THE MONEY HAS BEEN WITHDRAWN.
 3. BANK OVERDRAFT

• A BANK OVERDRAFT IS A FORM OF FINANCING THAT ALLOWS THE CURRENT

ACCOUNT HOLDERS TO OVERDRAW THEIR ACCOUNT UP TO A SPECIFIED LIMIT. IT
DOES NOT REQUIRE ANY WRITTEN FORMALITIES, AND CLIENTS USE THE
OVERDRAFT TO MEET URGENT NEEDS. INTEREST IS CHARGED ON THE AMOUNT
THAT THE CURRENT ACCOUNT HAS BEEN OVERDRAWN WITH AND NOT THE FULL
AMOUNT OF OVERDRAFT ALLOWED BY THE BANK.
 4. DISCOUNTED BILLS OF EXCHANGE

• A BANK DISCOUNTS A BILL OF EXCHANGE BY PROVIDING MONEY IMMEDIATELY

TO THE HOLDER OF THE BILL. THE BANK DEPOSITS THE MONEY IN THE
HOLDER’S CURRENT ACCOUNT AFTER DEDUCTING AN INTEREST RATE FOR THE
LOAN PERIOD. ONCE THE BILL OF EXCHANGE MATURES, THE BANK GETS ITS
PAYMENT FROM THE BANKER OF THE BILL HOLDER.
WHAT IS PUBLIC DEPOSIT?
THE DEPOSITS RAISED BY THE ORGANIZATIONS DIRECTLY
FROM THE PUBLIC IS CALLED PUBLIC DEPOSITS.
LET’S SEE A VIDEO ON SOURCES OF
BUSINESS FINANCE
 MERITS AND LIMITATION OF PUBLIC
DEPOSITS
MERITS LIMITATION
• PUBLIC DEPOSITS DO NOT CREATE ANY CHARGE ON THE • GROWING COMPANIES FIND IT DIFFICULT
ASSETS OF THE COMPANY, RATHER THE ASSETS CAN BE TO ATTRACT THE PUBLIC AND OBTAIN
USED AS SECURITY FOR RAISING LOANS.
FUNDS THROUGH THE PUBLIC DEPOSIT
• THE DEPOSITORS DO NOT HAVE ANY VOTING RIGHTS THUS, SYSTEM.
THE CONTROL OF THE COMPANY IS NOT DILUTED.
• IT IS NOT A RELIABLE SOURCE OF FINANCE
• THE PROCEDURE OF DEPOSITING IN THE COMPANY IS LESS
AS THE PUBLIC MAY NOT RESPOND WHEN
COMPLICATED AND BARELY CONTAINS OTHER
THE COMPANY NEEDS THE MONEY.
RESTRICTIVE CONDITIONS.
• COLLECTION OF THESE DEPOSITS SEEM TO
• THE COST OF PUBLIC DEPOSITS IS MUCH LOWER THAN THE
COST OF BORROWINGS FROM THE BANKS AND OTHER BE DIFFICULT, ESPECIALLY WHEN THE
FINANCIAL INSTITUTIONS. DEPOSITS REQUIRED ARE QUITE LARGE.
ANY DOUBTS..?