NCERT Textbook - Sources of Business Finance Commerce Notes | EduRev

Business Studies (BST) Class 11

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Commerce : NCERT Textbook - Sources of Business Finance Commerce Notes | EduRev

 Page 1


CHAPTER 8
SOURCES OF BUSINESS FINANCE
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.
© NCERT
not to be republished
Page 2


CHAPTER 8
SOURCES OF BUSINESS FINANCE
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.
© NCERT
not to be republished
182 BUSINESS STUDIES
8.1 INTRODUCTION
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, NATURE AND
SIGNIFICANCE OF BUSINESS
FINANCE
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
life blood of any business. 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 business. A business 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 various sources of finance, therefore,
is a significant aspect of running 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 restaurants at different places. However, the money available
with him 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.
© NCERT
not to be republished
Page 3


CHAPTER 8
SOURCES OF BUSINESS FINANCE
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.
© NCERT
not to be republished
182 BUSINESS STUDIES
8.1 INTRODUCTION
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, NATURE AND
SIGNIFICANCE OF BUSINESS
FINANCE
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
life blood of any business. 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 business. A business 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 various sources of finance, therefore,
is a significant aspect of running 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 restaurants at different places. However, the money available
with him 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.
© NCERT
not to be republished
183 SOURCES OF BUSINESS FINANCE
the purchase of plant and machinery,
furniture, and other fixed assets.
Similarly, some funds are required 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: In
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
capital requirements of the
enterprise. The funds required in
fixed assets remain invested in the
business for a long period of time.
Different 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 the
procurement of fixed assets. No
matter how small or large a business
is, it needs funds for its day-to-day
operations. This 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 various
factors. A business unit selling 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 location. It
is, therefore, important to evaluate the
different sources from where funds can
be raised.
8.3 CLASSIFICATION OF SOURCES OF
FUNDS
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
different sources of business 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
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:
© NCERT
not to be republished
Page 4


CHAPTER 8
SOURCES OF BUSINESS FINANCE
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.
© NCERT
not to be republished
182 BUSINESS STUDIES
8.1 INTRODUCTION
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, NATURE AND
SIGNIFICANCE OF BUSINESS
FINANCE
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
life blood of any business. 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 business. A business 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 various sources of finance, therefore,
is a significant aspect of running 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 restaurants at different places. However, the money available
with him 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.
© NCERT
not to be republished
183 SOURCES OF BUSINESS FINANCE
the purchase of plant and machinery,
furniture, and other fixed assets.
Similarly, some funds are required 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: In
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
capital requirements of the
enterprise. The funds required in
fixed assets remain invested in the
business for a long period of time.
Different 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 the
procurement of fixed assets. No
matter how small or large a business
is, it needs funds for its day-to-day
operations. This 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 various
factors. A business unit selling 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 location. It
is, therefore, important to evaluate the
different sources from where funds can
be raised.
8.3 CLASSIFICATION OF SOURCES OF
FUNDS
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
different sources of business 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
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:
© NCERT
not to be republished
184 BUSINESS STUDIES
Table 8.1    Classification of Sources of Funds
© NCERT
not to be republished
Page 5


CHAPTER 8
SOURCES OF BUSINESS FINANCE
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.
© NCERT
not to be republished
182 BUSINESS STUDIES
8.1 INTRODUCTION
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, NATURE AND
SIGNIFICANCE OF BUSINESS
FINANCE
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
life blood of any business. 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 business. A business 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 various sources of finance, therefore,
is a significant aspect of running 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 restaurants at different places. However, the money available
with him 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.
© NCERT
not to be republished
183 SOURCES OF BUSINESS FINANCE
the purchase of plant and machinery,
furniture, and other fixed assets.
Similarly, some funds are required 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: In
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
capital requirements of the
enterprise. The funds required in
fixed assets remain invested in the
business for a long period of time.
Different 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 the
procurement of fixed assets. No
matter how small or large a business
is, it needs funds for its day-to-day
operations. This 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 various
factors. A business unit selling 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 location. It
is, therefore, important to evaluate the
different sources from where funds can
be raised.
8.3 CLASSIFICATION OF SOURCES OF
FUNDS
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
different sources of business 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
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:
© NCERT
not to be republished
184 BUSINESS STUDIES
Table 8.1    Classification of Sources of Funds
© NCERT
not to be republished
185 SOURCES OF BUSINESS FINANCE
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
from capital, it also includes profits
reinvested in the business. The
owner’s capital remains invested in 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 funds’ on the other
hand, refer to the funds raised through
loans or borrowings. The sources for
raising borrowed funds include loans
from commercial banks, loans from
financial institutions, issue 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 on such funds. At times it
puts a lot of burden on the business
as payment of interest is to be made
even when the earnings are low or
when loss is incurred. Generally,
borrowed funds are provided on the
security of some fixed assets.
© NCERT
not to be republished
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