NCERT Textbook - Sources of Business Finance | Business Studies (BST) Class 11 - Commerce PDF Download

 Page 1


Chapter 8
Source S of Bu Sine SS f inance LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
state 	the	meaning, 	nature 	 and	importance 	of	 business 	 finance;
•	
classify 	the	various 	sources 	 of 	 business	finance;
•	
evaluate 	merits 	and 	 limitations	 of	various 	sources	of 	finance;
•	
identify 	 the	international	sources	of 	finance; 	 and
•	
examine the factors that affect the choice of an appropriate source 
of 	finance.
Chapter 8.indd   172 9/2/2022   2:14:08 PM
2024-25
Page 2


Chapter 8
Source S of Bu Sine SS f inance LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
state 	the	meaning, 	nature 	 and	importance 	of	 business 	 finance;
•	
classify 	the	various 	sources 	 of 	 business	finance;
•	
evaluate 	merits 	and 	 limitations	 of	various 	sources	of 	finance;
•	
identify 	 the	international	sources	of 	finance; 	 and
•	
examine the factors that affect the choice of an appropriate source 
of 	finance.
Chapter 8.indd   172 9/2/2022   2:14:08 PM
2024-25
173 SOURCES OF BUSINESS FINANCE
8.1 i ntro duction This chapter provides an overview of 
the various sources from where funds 
can be procured for starting as also for 
running 	 a 	 business. 	 It 	 also	 discusses 	
the advantages and limitations of 
various sources and points out the 
factors that determine the choice of a 
suitable 	source	of 	 business 	finance.
It 	 is	 important	 for 	 any 	 person 	 who	
wants to start a business to know 
about the different sources from 
where 	 money 	 can 	 be	 raised.	 It 	 is	 also	
important to know the relative merits 
and demerits of different sources so 
that choice of an appropriate source 
can	 be 	 made.
8.2 Meaning , n ature and Significance 
of Bu Sine SS f inance Business is concerned with the 
production and distribution of goods 
and services for the satisfaction of 
needs 	 of 	 society. 	 For 	 carrying 	 out	
various activities, business requires 
money. 	 Finance, 	 therefore, 	 is 	 called 	 the 
l i f e 	 bl ood 	 of 	 any 	 busi ness. 	 The	
requirements of funds by business to 
carry out its various activities is called 
business	finance. 	
A business cannot function unless 
adequate funds are made available to 
it. 	 The 	 initial 	 capital 	 contributed 	 by 	 the	
entrepreneur 	 is 	 not 	 always 	 sufficient 	 to	
take 	 care	 of	 all 	 financial 	 requirements	
of 	 the 	 busi ness. 	 A 	 busi ness 	 person, 	
therefore, has to look for different other 
sources from where the need for funds 
can	 be 	 met.	 A 	 clear	 assessment 	 of 	 the 	
financial 	 needs 	 and 	 the 	 identification 	
of 	 vari ous 	 sources 	 of 	 finance, 	 therefore,	
is 	 a 	 significan t 	 aspect 	 of 	 ru nning 	 a	
business	organisation.	
The need for funds arises from the 
stage when an entrepreneur makes 
a	 decision	 to	 start	 a	 business.	 Some	
funds are needed immediately say for 
Mr. 	 Anil 	 Singh 	 has	 been	 running 	 a 	 restaurant	 for	 the	 last	 two 	 years. 	 The	 excellent	
quality 	 of 	 food 	 has 	 made 	 the 	 restaurant 	 popular 	 in 	 no 	 time. 	 Motivated 	 by 	 the 	 success	
of	 his	 business,	 Mr. 	 Singh 	 is	 now	 contemplating	 the 	 idea	 of 	 opening	 a 	 chain	 of	
similar 	 restau ran ts 	 at 	 different 	 places. 	 However, 	 the 	 mon ey 	 available 	 with 	 h im 	 from	
his	 personal 	 sources	 is	 not 	 sufficient 	 to 	 meet 	 the 	 expansion	 requirements	 of 	 his 	
business. 	 His 	 father 	 told 	 him 	 that 	 he 	 can 	 enter 	 into 	 a 	 partnership 	 with 	 the 	 owner 	 of	
another restaurant, who will bring in more funds but it would also require sharing 
of	 profits 	 and	 control 	 of	 business.	 He	 is 	 also 	 thinking 	 of 	 getting	 a	 bank	 loan.	 He 	
is worried and confused, as he has no idea as to how and from where he should 
obtain 	 additional	 funds. 	 He 	 discusses	 the	 problem	 with	 his	 friend	 Ramesh,	 who	
tells him about some other methods like issue of shares and debentures, which 
are	 available 	 only 	 to	 a	 company	 form	 of	 organisation. 	 He	 further	 cautions	 him 	 that	
each 	 method	 has	 its 	 own	 advantages	 and	 limitations	 and	 his	 final 	 choice	 should 	
be	 based	 on	 factors	 like	 the	 purpose	 and	 period	 for	 which 	 funds 	 are	 required.	 He	
wants 	to 	 learn	about	 these	methods.
Chapter 8.indd   173 9/2/2022   2:14:08 PM
2024-25
Page 3


Chapter 8
Source S of Bu Sine SS f inance LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
state 	the	meaning, 	nature 	 and	importance 	of	 business 	 finance;
•	
classify 	the	various 	sources 	 of 	 business	finance;
•	
evaluate 	merits 	and 	 limitations	 of	various 	sources	of 	finance;
•	
identify 	 the	international	sources	of 	finance; 	 and
•	
examine the factors that affect the choice of an appropriate source 
of 	finance.
Chapter 8.indd   172 9/2/2022   2:14:08 PM
2024-25
173 SOURCES OF BUSINESS FINANCE
8.1 i ntro duction This chapter provides an overview of 
the various sources from where funds 
can be procured for starting as also for 
running 	 a 	 business. 	 It 	 also	 discusses 	
the advantages and limitations of 
various sources and points out the 
factors that determine the choice of a 
suitable 	source	of 	 business 	finance.
It 	 is	 important	 for 	 any 	 person 	 who	
wants to start a business to know 
about the different sources from 
where 	 money 	 can 	 be	 raised.	 It 	 is	 also	
important to know the relative merits 
and demerits of different sources so 
that choice of an appropriate source 
can	 be 	 made.
8.2 Meaning , n ature and Significance 
of Bu Sine SS f inance Business is concerned with the 
production and distribution of goods 
and services for the satisfaction of 
needs 	 of 	 society. 	 For 	 carrying 	 out	
various activities, business requires 
money. 	 Finance, 	 therefore, 	 is 	 called 	 the 
l i f e 	 bl ood 	 of 	 any 	 busi ness. 	 The	
requirements of funds by business to 
carry out its various activities is called 
business	finance. 	
A business cannot function unless 
adequate funds are made available to 
it. 	 The 	 initial 	 capital 	 contributed 	 by 	 the	
entrepreneur 	 is 	 not 	 always 	 sufficient 	 to	
take 	 care	 of	 all 	 financial 	 requirements	
of 	 the 	 busi ness. 	 A 	 busi ness 	 person, 	
therefore, has to look for different other 
sources from where the need for funds 
can	 be 	 met.	 A 	 clear	 assessment 	 of 	 the 	
financial 	 needs 	 and 	 the 	 identification 	
of 	 vari ous 	 sources 	 of 	 finance, 	 therefore,	
is 	 a 	 significan t 	 aspect 	 of 	 ru nning 	 a	
business	organisation.	
The need for funds arises from the 
stage when an entrepreneur makes 
a	 decision	 to	 start	 a	 business.	 Some	
funds are needed immediately say for 
Mr. 	 Anil 	 Singh 	 has	 been	 running 	 a 	 restaurant	 for	 the	 last	 two 	 years. 	 The	 excellent	
quality 	 of 	 food 	 has 	 made 	 the 	 restaurant 	 popular 	 in 	 no 	 time. 	 Motivated 	 by 	 the 	 success	
of	 his	 business,	 Mr. 	 Singh 	 is	 now	 contemplating	 the 	 idea	 of 	 opening	 a 	 chain	 of	
similar 	 restau ran ts 	 at 	 different 	 places. 	 However, 	 the 	 mon ey 	 available 	 with 	 h im 	 from	
his	 personal 	 sources	 is	 not 	 sufficient 	 to 	 meet 	 the 	 expansion	 requirements	 of 	 his 	
business. 	 His 	 father 	 told 	 him 	 that 	 he 	 can 	 enter 	 into 	 a 	 partnership 	 with 	 the 	 owner 	 of	
another restaurant, who will bring in more funds but it would also require sharing 
of	 profits 	 and	 control 	 of	 business.	 He	 is 	 also 	 thinking 	 of 	 getting	 a	 bank	 loan.	 He 	
is worried and confused, as he has no idea as to how and from where he should 
obtain 	 additional	 funds. 	 He 	 discusses	 the	 problem	 with	 his	 friend	 Ramesh,	 who	
tells him about some other methods like issue of shares and debentures, which 
are	 available 	 only 	 to	 a	 company	 form	 of	 organisation. 	 He	 further	 cautions	 him 	 that	
each 	 method	 has	 its 	 own	 advantages	 and	 limitations	 and	 his	 final 	 choice	 should 	
be	 based	 on	 factors	 like	 the	 purpose	 and	 period	 for	 which 	 funds 	 are	 required.	 He	
wants 	to 	 learn	about	 these	methods.
Chapter 8.indd   173 9/2/2022   2:14:08 PM
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174 BUSINESS  STUDIES
the purchase of plant and machinery, 
furniture, 	 and 	 other 	 fixed 	 assets.	
S imilarly, 	 some 	 fu n ds 	 are 	 requ ired	
for day-to-day operations, say to 
purchase raw materials, pay salaries to 
employees, 	 etc. 	 Also 	 when 	 the 	 business	 	
expands, 	 it 	 needs 	 funds.
The 	 financial 	 needs 	 of 	 a 	 business	
can be categorised as follows:
( a) Fixed capital requirements: 	 I n	
order to start business, funds 
are required to purchase fixed 
assets like land and building, plant 
and machinery, and furniture 
and 	 fixtures. 	 This 	 is 	 known 	 as	
fixed 	 capi tal 	 requirement s 	 of 	 the	
enterprise. 	 The	 funds 	 required	 in 	
fixed assets remain invested in 
the business for a long period of 
time. 	 Di fferent 	 business 	 units 	 need	
varying amount of fixed capital 
depending on various factors such 
as 	 the 	 nature	 of 	 business,	 etc.	 A	
trading concern for example, may 
require 	 small 	 amount 	 of 	 fixed 	 capital	
as compared to a manufacturing 
concern. 	 Likewise, 	 the 	 need 	 for	
fixed capital investment would 
be greater for a large enterprise, 
as compared to that of a small 
enterprise.
 (b) Working capital requirements: 
The financial requirements of 
an enterprise do not end with 
t he 	 pr ocurem ent 	 of 	 fixed 	 asset s.	
No matter how small or large a 
business is, it needs funds for 
i t s 	 day- t o- day 	 operat i ons. 	 Thi s	
is known as working capital of 
an enterprise, which is used for 
holding current assets such as 
stock of material, bills receivables 
and for meeting current expenses 
like salaries, wages, taxes, and 
rent.
The amount of working capital 
required varies from one business 
concern to another depending on 
variou s 	 factors. 	 A 	 b u sin ess 	 u n it 	 sellin g	
goods on credit, or having a slow sales 
turnover, for example, would require 
more working capital as compared to a 
concern selling its goods and services 
on cash basis or having a speedier 
turnover.
The requirement for fixed and 
working capital increases with the 
growth	 and	 expansion	 of	 business.	 At 	
times additional funds are required for 
upgrading the technology employed 
so that the cost of production or 
operations	 can	 be	 reduced. 	 Similarly, 	
larger funds may be required for 
building higher inventories for the 
festive season or to meet current debts 
or expand the business or to shift to a 
new 	 l ocat i on. 	 I t 	 i s, 	 theref ore, 	 i mportant	
to evaluate the different sources from 
where	funds	 can	be	raised. 
8.3 c la SSification of Source S of 
f und S
In 	 case 	 of 	 proprietary 	 and 	 partnership	
concerns, the funds may be raised either 
from personal sources or borrowings 
from 	 banks, 	 friends 	 etc. 	 In 	 case 	 of	
company form of organisation, the 
di fferent 	 sources 	 of 	 busi ness 	 finance 	
which are available may be categorised 
as 	 given 	 in 	 Table 	 8.1
As shown in the table, the sources 
of funds can be categorised using 
Chapter 8.indd   174 9/2/2022   2:14:08 PM
2024-25
Page 4


Chapter 8
Source S of Bu Sine SS f inance LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
state 	the	meaning, 	nature 	 and	importance 	of	 business 	 finance;
•	
classify 	the	various 	sources 	 of 	 business	finance;
•	
evaluate 	merits 	and 	 limitations	 of	various 	sources	of 	finance;
•	
identify 	 the	international	sources	of 	finance; 	 and
•	
examine the factors that affect the choice of an appropriate source 
of 	finance.
Chapter 8.indd   172 9/2/2022   2:14:08 PM
2024-25
173 SOURCES OF BUSINESS FINANCE
8.1 i ntro duction This chapter provides an overview of 
the various sources from where funds 
can be procured for starting as also for 
running 	 a 	 business. 	 It 	 also	 discusses 	
the advantages and limitations of 
various sources and points out the 
factors that determine the choice of a 
suitable 	source	of 	 business 	finance.
It 	 is	 important	 for 	 any 	 person 	 who	
wants to start a business to know 
about the different sources from 
where 	 money 	 can 	 be	 raised.	 It 	 is	 also	
important to know the relative merits 
and demerits of different sources so 
that choice of an appropriate source 
can	 be 	 made.
8.2 Meaning , n ature and Significance 
of Bu Sine SS f inance Business is concerned with the 
production and distribution of goods 
and services for the satisfaction of 
needs 	 of 	 society. 	 For 	 carrying 	 out	
various activities, business requires 
money. 	 Finance, 	 therefore, 	 is 	 called 	 the 
l i f e 	 bl ood 	 of 	 any 	 busi ness. 	 The	
requirements of funds by business to 
carry out its various activities is called 
business	finance. 	
A business cannot function unless 
adequate funds are made available to 
it. 	 The 	 initial 	 capital 	 contributed 	 by 	 the	
entrepreneur 	 is 	 not 	 always 	 sufficient 	 to	
take 	 care	 of	 all 	 financial 	 requirements	
of 	 the 	 busi ness. 	 A 	 busi ness 	 person, 	
therefore, has to look for different other 
sources from where the need for funds 
can	 be 	 met.	 A 	 clear	 assessment 	 of 	 the 	
financial 	 needs 	 and 	 the 	 identification 	
of 	 vari ous 	 sources 	 of 	 finance, 	 therefore,	
is 	 a 	 significan t 	 aspect 	 of 	 ru nning 	 a	
business	organisation.	
The need for funds arises from the 
stage when an entrepreneur makes 
a	 decision	 to	 start	 a	 business.	 Some	
funds are needed immediately say for 
Mr. 	 Anil 	 Singh 	 has	 been	 running 	 a 	 restaurant	 for	 the	 last	 two 	 years. 	 The	 excellent	
quality 	 of 	 food 	 has 	 made 	 the 	 restaurant 	 popular 	 in 	 no 	 time. 	 Motivated 	 by 	 the 	 success	
of	 his	 business,	 Mr. 	 Singh 	 is	 now	 contemplating	 the 	 idea	 of 	 opening	 a 	 chain	 of	
similar 	 restau ran ts 	 at 	 different 	 places. 	 However, 	 the 	 mon ey 	 available 	 with 	 h im 	 from	
his	 personal 	 sources	 is	 not 	 sufficient 	 to 	 meet 	 the 	 expansion	 requirements	 of 	 his 	
business. 	 His 	 father 	 told 	 him 	 that 	 he 	 can 	 enter 	 into 	 a 	 partnership 	 with 	 the 	 owner 	 of	
another restaurant, who will bring in more funds but it would also require sharing 
of	 profits 	 and	 control 	 of	 business.	 He	 is 	 also 	 thinking 	 of 	 getting	 a	 bank	 loan.	 He 	
is worried and confused, as he has no idea as to how and from where he should 
obtain 	 additional	 funds. 	 He 	 discusses	 the	 problem	 with	 his	 friend	 Ramesh,	 who	
tells him about some other methods like issue of shares and debentures, which 
are	 available 	 only 	 to	 a	 company	 form	 of	 organisation. 	 He	 further	 cautions	 him 	 that	
each 	 method	 has	 its 	 own	 advantages	 and	 limitations	 and	 his	 final 	 choice	 should 	
be	 based	 on	 factors	 like	 the	 purpose	 and	 period	 for	 which 	 funds 	 are	 required.	 He	
wants 	to 	 learn	about	 these	methods.
Chapter 8.indd   173 9/2/2022   2:14:08 PM
2024-25
174 BUSINESS  STUDIES
the purchase of plant and machinery, 
furniture, 	 and 	 other 	 fixed 	 assets.	
S imilarly, 	 some 	 fu n ds 	 are 	 requ ired	
for day-to-day operations, say to 
purchase raw materials, pay salaries to 
employees, 	 etc. 	 Also 	 when 	 the 	 business	 	
expands, 	 it 	 needs 	 funds.
The 	 financial 	 needs 	 of 	 a 	 business	
can be categorised as follows:
( a) Fixed capital requirements: 	 I n	
order to start business, funds 
are required to purchase fixed 
assets like land and building, plant 
and machinery, and furniture 
and 	 fixtures. 	 This 	 is 	 known 	 as	
fixed 	 capi tal 	 requirement s 	 of 	 the	
enterprise. 	 The	 funds 	 required	 in 	
fixed assets remain invested in 
the business for a long period of 
time. 	 Di fferent 	 business 	 units 	 need	
varying amount of fixed capital 
depending on various factors such 
as 	 the 	 nature	 of 	 business,	 etc.	 A	
trading concern for example, may 
require 	 small 	 amount 	 of 	 fixed 	 capital	
as compared to a manufacturing 
concern. 	 Likewise, 	 the 	 need 	 for	
fixed capital investment would 
be greater for a large enterprise, 
as compared to that of a small 
enterprise.
 (b) Working capital requirements: 
The financial requirements of 
an enterprise do not end with 
t he 	 pr ocurem ent 	 of 	 fixed 	 asset s.	
No matter how small or large a 
business is, it needs funds for 
i t s 	 day- t o- day 	 operat i ons. 	 Thi s	
is known as working capital of 
an enterprise, which is used for 
holding current assets such as 
stock of material, bills receivables 
and for meeting current expenses 
like salaries, wages, taxes, and 
rent.
The amount of working capital 
required varies from one business 
concern to another depending on 
variou s 	 factors. 	 A 	 b u sin ess 	 u n it 	 sellin g	
goods on credit, or having a slow sales 
turnover, for example, would require 
more working capital as compared to a 
concern selling its goods and services 
on cash basis or having a speedier 
turnover.
The requirement for fixed and 
working capital increases with the 
growth	 and	 expansion	 of	 business.	 At 	
times additional funds are required for 
upgrading the technology employed 
so that the cost of production or 
operations	 can	 be	 reduced. 	 Similarly, 	
larger funds may be required for 
building higher inventories for the 
festive season or to meet current debts 
or expand the business or to shift to a 
new 	 l ocat i on. 	 I t 	 i s, 	 theref ore, 	 i mportant	
to evaluate the different sources from 
where	funds	 can	be	raised. 
8.3 c la SSification of Source S of 
f und S
In 	 case 	 of 	 proprietary 	 and 	 partnership	
concerns, the funds may be raised either 
from personal sources or borrowings 
from 	 banks, 	 friends 	 etc. 	 In 	 case 	 of	
company form of organisation, the 
di fferent 	 sources 	 of 	 busi ness 	 finance 	
which are available may be categorised 
as 	 given 	 in 	 Table 	 8.1
As shown in the table, the sources 
of funds can be categorised using 
Chapter 8.indd   174 9/2/2022   2:14:08 PM
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175 SOURCES OF BUSINESS FINANCE
Table 8.1    Classification of Sources of Funds
Chapter 8.indd   175 9/2/2022   2:14:08 PM
2024-25
Page 5


Chapter 8
Source S of Bu Sine SS f inance LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
state 	the	meaning, 	nature 	 and	importance 	of	 business 	 finance;
•	
classify 	the	various 	sources 	 of 	 business	finance;
•	
evaluate 	merits 	and 	 limitations	 of	various 	sources	of 	finance;
•	
identify 	 the	international	sources	of 	finance; 	 and
•	
examine the factors that affect the choice of an appropriate source 
of 	finance.
Chapter 8.indd   172 9/2/2022   2:14:08 PM
2024-25
173 SOURCES OF BUSINESS FINANCE
8.1 i ntro duction This chapter provides an overview of 
the various sources from where funds 
can be procured for starting as also for 
running 	 a 	 business. 	 It 	 also	 discusses 	
the advantages and limitations of 
various sources and points out the 
factors that determine the choice of a 
suitable 	source	of 	 business 	finance.
It 	 is	 important	 for 	 any 	 person 	 who	
wants to start a business to know 
about the different sources from 
where 	 money 	 can 	 be	 raised.	 It 	 is	 also	
important to know the relative merits 
and demerits of different sources so 
that choice of an appropriate source 
can	 be 	 made.
8.2 Meaning , n ature and Significance 
of Bu Sine SS f inance Business is concerned with the 
production and distribution of goods 
and services for the satisfaction of 
needs 	 of 	 society. 	 For 	 carrying 	 out	
various activities, business requires 
money. 	 Finance, 	 therefore, 	 is 	 called 	 the 
l i f e 	 bl ood 	 of 	 any 	 busi ness. 	 The	
requirements of funds by business to 
carry out its various activities is called 
business	finance. 	
A business cannot function unless 
adequate funds are made available to 
it. 	 The 	 initial 	 capital 	 contributed 	 by 	 the	
entrepreneur 	 is 	 not 	 always 	 sufficient 	 to	
take 	 care	 of	 all 	 financial 	 requirements	
of 	 the 	 busi ness. 	 A 	 busi ness 	 person, 	
therefore, has to look for different other 
sources from where the need for funds 
can	 be 	 met.	 A 	 clear	 assessment 	 of 	 the 	
financial 	 needs 	 and 	 the 	 identification 	
of 	 vari ous 	 sources 	 of 	 finance, 	 therefore,	
is 	 a 	 significan t 	 aspect 	 of 	 ru nning 	 a	
business	organisation.	
The need for funds arises from the 
stage when an entrepreneur makes 
a	 decision	 to	 start	 a	 business.	 Some	
funds are needed immediately say for 
Mr. 	 Anil 	 Singh 	 has	 been	 running 	 a 	 restaurant	 for	 the	 last	 two 	 years. 	 The	 excellent	
quality 	 of 	 food 	 has 	 made 	 the 	 restaurant 	 popular 	 in 	 no 	 time. 	 Motivated 	 by 	 the 	 success	
of	 his	 business,	 Mr. 	 Singh 	 is	 now	 contemplating	 the 	 idea	 of 	 opening	 a 	 chain	 of	
similar 	 restau ran ts 	 at 	 different 	 places. 	 However, 	 the 	 mon ey 	 available 	 with 	 h im 	 from	
his	 personal 	 sources	 is	 not 	 sufficient 	 to 	 meet 	 the 	 expansion	 requirements	 of 	 his 	
business. 	 His 	 father 	 told 	 him 	 that 	 he 	 can 	 enter 	 into 	 a 	 partnership 	 with 	 the 	 owner 	 of	
another restaurant, who will bring in more funds but it would also require sharing 
of	 profits 	 and	 control 	 of	 business.	 He	 is 	 also 	 thinking 	 of 	 getting	 a	 bank	 loan.	 He 	
is worried and confused, as he has no idea as to how and from where he should 
obtain 	 additional	 funds. 	 He 	 discusses	 the	 problem	 with	 his	 friend	 Ramesh,	 who	
tells him about some other methods like issue of shares and debentures, which 
are	 available 	 only 	 to	 a	 company	 form	 of	 organisation. 	 He	 further	 cautions	 him 	 that	
each 	 method	 has	 its 	 own	 advantages	 and	 limitations	 and	 his	 final 	 choice	 should 	
be	 based	 on	 factors	 like	 the	 purpose	 and	 period	 for	 which 	 funds 	 are	 required.	 He	
wants 	to 	 learn	about	 these	methods.
Chapter 8.indd   173 9/2/2022   2:14:08 PM
2024-25
174 BUSINESS  STUDIES
the purchase of plant and machinery, 
furniture, 	 and 	 other 	 fixed 	 assets.	
S imilarly, 	 some 	 fu n ds 	 are 	 requ ired	
for day-to-day operations, say to 
purchase raw materials, pay salaries to 
employees, 	 etc. 	 Also 	 when 	 the 	 business	 	
expands, 	 it 	 needs 	 funds.
The 	 financial 	 needs 	 of 	 a 	 business	
can be categorised as follows:
( a) Fixed capital requirements: 	 I n	
order to start business, funds 
are required to purchase fixed 
assets like land and building, plant 
and machinery, and furniture 
and 	 fixtures. 	 This 	 is 	 known 	 as	
fixed 	 capi tal 	 requirement s 	 of 	 the	
enterprise. 	 The	 funds 	 required	 in 	
fixed assets remain invested in 
the business for a long period of 
time. 	 Di fferent 	 business 	 units 	 need	
varying amount of fixed capital 
depending on various factors such 
as 	 the 	 nature	 of 	 business,	 etc.	 A	
trading concern for example, may 
require 	 small 	 amount 	 of 	 fixed 	 capital	
as compared to a manufacturing 
concern. 	 Likewise, 	 the 	 need 	 for	
fixed capital investment would 
be greater for a large enterprise, 
as compared to that of a small 
enterprise.
 (b) Working capital requirements: 
The financial requirements of 
an enterprise do not end with 
t he 	 pr ocurem ent 	 of 	 fixed 	 asset s.	
No matter how small or large a 
business is, it needs funds for 
i t s 	 day- t o- day 	 operat i ons. 	 Thi s	
is known as working capital of 
an enterprise, which is used for 
holding current assets such as 
stock of material, bills receivables 
and for meeting current expenses 
like salaries, wages, taxes, and 
rent.
The amount of working capital 
required varies from one business 
concern to another depending on 
variou s 	 factors. 	 A 	 b u sin ess 	 u n it 	 sellin g	
goods on credit, or having a slow sales 
turnover, for example, would require 
more working capital as compared to a 
concern selling its goods and services 
on cash basis or having a speedier 
turnover.
The requirement for fixed and 
working capital increases with the 
growth	 and	 expansion	 of	 business.	 At 	
times additional funds are required for 
upgrading the technology employed 
so that the cost of production or 
operations	 can	 be	 reduced. 	 Similarly, 	
larger funds may be required for 
building higher inventories for the 
festive season or to meet current debts 
or expand the business or to shift to a 
new 	 l ocat i on. 	 I t 	 i s, 	 theref ore, 	 i mportant	
to evaluate the different sources from 
where	funds	 can	be	raised. 
8.3 c la SSification of Source S of 
f und S
In 	 case 	 of 	 proprietary 	 and 	 partnership	
concerns, the funds may be raised either 
from personal sources or borrowings 
from 	 banks, 	 friends 	 etc. 	 In 	 case 	 of	
company form of organisation, the 
di fferent 	 sources 	 of 	 busi ness 	 finance 	
which are available may be categorised 
as 	 given 	 in 	 Table 	 8.1
As shown in the table, the sources 
of funds can be categorised using 
Chapter 8.indd   174 9/2/2022   2:14:08 PM
2024-25
175 SOURCES OF BUSINESS FINANCE
Table 8.1    Classification of Sources of Funds
Chapter 8.indd   175 9/2/2022   2:14:08 PM
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176 BUSINESS  STUDIES
different 	 basis 	 viz., 	 on 	 the 	 basis 	 of	
the period, source of generation and 
the	 ownership. 	 A	 brief 	 explanation	 of	
these 	 classifications 	 and 	 the 	 sources	
is provided as follows:
8.3.1 Period Basis  
On the basis of period, the different 
sources of funds can be categorised 
into	 three 	 parts. 	 These	 are 	 long-term 	
sources, medium-term sources and 
short-term 	 sources.
The 	 long-term 	 sources 	 fulfil 	 the	
financial 	 requirements 	 of 	 an 	 enterprise	
for a period exceeding 5 years and 
include sources such as shares and 
debentures, long-term borrowings and 
loans 	 from 	 financial 	 institutions. 	 Such	
financing 	 is	 generally	 required	 for 	 the	
acquisition 	 of 	 fixed 	 assets 	 such 	 as	
equipment, 	 plant,	etc.	
Where the funds are required for a 
period of more than one year but less 
than	 five 	 years,	 medium-term	 sources 	
of 	 finance 	 are 	 used. 	 These 	 sources	
include borrowings from commercial 
banks, 	 public 	 deposits, 	 lease 	 financing 	
and	loans 	from	financial 	institutions.	
Short-term	 funds 	 are 	 those	 which	
are required for a period not exceeding 
one 	 year. 	 Trade 	 credit, 	 loans 	 from	
commercial banks and commercial 
papers are some of the examples of the 
sources that provide funds for short 
duration. 	
Short-term 	 financing 	 is 	 most	
common for financing of current 
assets such as accounts receivable 
and	 inventories. 	 Seasonal	 businesses	
that must build inventories in 
anticipation of selling requirements 
often 	 need 	 short-term 	 financing 	 for	
the	 interim	 period	 between	 seasons. 	
Wholesalers and manufacturers with 
a major portion of their assets tied 
up in inventories or receivables also  
require large amount of funds for a 
short	period.
8.3.2 Ownership Basis
On the basis of ownership, the sources 
can	 be	 classified 	 into 	 ‘owner’s 	 funds’ 	
and	 ‘borrowed 	 funds’. 	 Owner’s 	 funds	
means funds that are provided by the 
owners of an enterprise, which may 
be a sole trader or partners or 
shareholders 	 of 	 a 	 company. 	 Apart	
f r om 	 capi t al , 	 i t 	 al so 	 i nc l udes 	 pr ofit s 	
r ei nve st ed 	 i n 	 t he 	 busi ne ss. 	 The	
ow ne r ’s 	 capi t al 	 rem ai ns 	 i nv est ed 	 i n	
the business for a longer duration 
and is not required to be refunded 
during	 the 	 life 	 period 	 of 	 the 	 business.	
Such	 capital	 forms	 the 	 basis	 on 	 which 	
owners acquire their right of control of 
management. 	 Issue 	 of 	 equity 	 shares 	
and retained earnings are the two 
important 	 sources 	 from 	 where 	 owner’s	
funds	can	 be 	obtained. 	
‘ Borrowed 	 fu n ds’ 	 on 	 th e 	 oth er	
hand, refer to the funds raised through 
l oans 	 or 	 borrow i ngs. 	 The 	 sources	
for raising borrowed funds include 
loans from commercial banks, loans 
f r o m 	 fina nc i al 	 i ns t i t ut i ons , 	 i s s ue 	 of	
debentures, public deposits and trade 
credit. 	 Such	 sources 	 provide 	 funds	 for 	
a 	 specified 	 period, 	 on 	 certain 	 terms	
and conditions and have to be repaid 
after	 the 	 expiry	 of 	 that	 period.	 A 	 fixed 	
rate of interest is paid by the borrowers 
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