Ch 7Sources of Business Finance — Class 11 Business Studies, concept-first.

A story that sets the stage - Mr Anil Singh has run a successful restaurant for the last two years — the excellent food made it popular quickly.

Business is about producing and distributing goods and services to satisfy society's needs — and every one of those activities needs money.

Where a business can raise funds depends partly on its form of organisation:

On the basis of time period for which the money is required, sources of funds fall into three groups: long-term, medium-term and short-term.

On the basis of ownership, the sources of funds are classified into owner's funds and borrowed funds.

On the basis of source of generation — that is, where the funds come from relative to the organisation — sources are classified as internal or external.

A business can raise funds from many different sources, and each has its own characteristics that must be understood before choosing.

Meaning: A company usually does not distribute all its profits to shareholders as dividends. A portion of the net earnings is kept back in the business for future use — this is called retained earning…

Meaning: Trade credit is credit extended by one trader to another for the purchase of goods and services — it lets a firm buy supplies without paying immediately.

Meaning: Factoring is a financial service in which a "factor" provides a bundle of services to a client firm. These services include:

Meaning: A lease is a contractual agreement in which the owner of an asset (the lessor) grants another party (the lessee) the right to use the asset in return for a periodic payment.

Meaning: Public deposits are deposits raised by an organisation directly from the public. The rate of interest offered is usually higher than on bank deposits, which attracts depositors.

Meaning: Commercial Paper (CP) is an unsecured money-market instrument issued in the form of a promissory note.

Meaning of share capital: The capital raised by issuing shares is called share capital. A company's capital is divided into small units called shares, each with a nominal (face) value.

Meaning: Debentures are an important instrument for raising long-term debt capital. A company raises funds by issuing debentures, which carry a fixed rate of interest.

Meaning: Commercial banks occupy a vital position because they provide funds for different purposes and for different time periods. Banks lend to firms of all sizes in many ways:

Meaning: The government has set up a number of financial institutions across the country — established by both the central and state governments — to provide finance to business organisations.

As the economy opened up and businesses became global, Indian companies gained access to funds in global capital markets.

A firm's financial needs are of different types — long-term, short-term, fixed and fluctuating — so businesses use different sources to raise funds.

- Finance — the money a business needs to establish and run its operations. - Owned capital — funds provided by the owners of an enterprise (including reinvested profits); not repayable during the lif…

Meaning and significance of business finance: The finance a business needs to establish and run its operations is business finance.