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Sources of Business Finance – CBSE Notes for Class 11 Business Studies
Concept, Nature, and Significance of Business Finance
Quick Review— Sources of Business Finance is an important topic in Class 11 Business Studies. It refers to the various ways in which businesses can obtain funds to start, expand or run their operations.
-> Introduction: Every business enterprise, whether big or small, needs to be financed to carry on its operation. The importance of finance increased these days tremendously because of mass production and capital-intensive techniques. As a result, finance is considered the life-blood of any business.
The following article provides an overview of the different sources of business finance.
- Equity shares: Equity shares represent ownership in a company and provide the shareholders with a share in the company’s profits. Companies can raise funds by issuing new equity shares to the public or existing shareholders.
- Preference shares: Preference shares are a type of share capital that provides a fixed dividend to shareholders before the payment of any dividend to equity shareholders. Preference shares are less risky than equity shares but offer a lower return.
- Debentures: Debentures are long-term debt instruments that are issued by companies to raise funds. They carry a fixed rate of interest and have a specified maturity period.
- Retained earnings: Retained earnings are the profits that a company retains after paying dividends to shareholders. These funds can be used by the company to finance its operations or invest in new projects.
- Bank loans: Banks provide short-term and long-term loans to businesses. These loans can be secured or unsecured and carry a fixed rate of interest.
- Public deposits: Companies can raise funds by accepting deposits from the public. These deposits can be for a fixed period and carry a fixed rate of interest.
- Trade credit: Trade credit is a type of short-term finance that is provided by suppliers to their customers. It allows businesses to purchase goods and services on credit and pay at a later date.
- Factoring: Factoring is a type of financing in which a company sells its accounts receivable to a third party at a discount. This allows the company to receive cash immediately instead of waiting for the payment of invoices.
-> Nature And Significance Of Business Finance: Business Finance Refers to the Money required for carrying out business activities.
-> Need For Business Finance :
All business activities require some finance. Finance is needed :
- Start and establish a business.
- To run day-to-day activities of business like payment for raw materials, salaries etc.
- To modernize, expand and diversify the business.
Hence the availability of adequate finance is very crucial for the survival and growth of a business.
-> The financial needs of a business can be classified into two categories: Fixed capital requirement 2. Working capital requirement
Know the Terms:
- Finance: Funds or capital required to meet the needs of an organisation.
- Business Finance: Is concerned with the acquisition and utilisation of funds in meeting the financial needs and overall objectives of a business enterprise.
- Fixed Capital: The capital required for long-term investment in fixed assets of a business.
- Working Capital: The capital required to hold current assets and meet its day-to-day expenditure.
- Owners fund: Funds provided by the enterprise owners and remain invested in the business for a longer duration until the business continues to exist.
- Borrowed Fund: Fund raised through loans and borrowings on a fixed interest rate for a specified period.
- Financial Risk: The possibility of firms, inability to pay the interest and refund the borrowed amount.
In conclusion, businesses can obtain funds from various sources, including equity shares, preference shares, debentures, retained earnings, bank loans, public deposits, trade credit, and factoring. Each source of finance has its advantages and disadvantages, and companies need to choose the most appropriate source based on their requirements and financial situation.
