Key Points

Business finance refers to the money required for carrying out business activities. It is considered the lifeblood of any business, essential for its establishment, operation, and expansion.

Fixed capital is used to purchase long-term assets like land, buildings, and machinery. Working capital is needed for day-to-day operations, such as buying raw materials and paying salaries.

Sources of funds are classified as long-term (over 5 years), medium-term (1 to 5 years), and short-term (up to 1 year) based on the duration for which the funds are required.

Owner's funds are contributed by the owners (e.g., shares, retained earnings) and do not need to be repaid during the business's life. Borrowed funds are raised through loans (e.g., debentures, bank loans) and must be repaid after a specific period with interest.

Internal sources are generated from within the business, such as retained earnings. External sources are those that lie outside the organization, like loans from banks, issue of shares, or debentures.

Also known as ploughing back of profits, retained earnings are the portion of a company's net profit that is not distributed as dividends but is reinvested in the business. It is a permanent and internal source of finance.

Equity shares represent the ownership of a company. Equity shareholders are the real owners who bear the highest risk, have voting rights in management, and receive dividends based on profits.

Preference shareholders have preferential rights over equity shareholders in two aspects: receiving a fixed rate of dividend and repayment of capital at the time of winding up. They generally do not have voting rights.

Debentures are an acknowledgement of debt issued by a company to raise long-term funds. Debenture holders are creditors who receive a fixed rate of interest and are repaid the principal amount on a specified date.

Trade credit is a short-term financing source where a supplier allows a business to purchase goods and services on credit and pay for them at a later date. It is a convenient and continuous source of funds.

These are deposits raised by organizations directly from the public. Companies offer higher interest rates on public deposits compared to bank deposits, making it beneficial for both the depositor and the company.

Commercial Paper is an unsecured promissory note issued by large, financially sound companies to raise short-term funds for a period ranging from 7 days to one year. It was introduced in India in 1990.

A lease is a contractual agreement where the owner of an asset (lessor) grants another party (lessee) the right to use the asset in return for a periodic payment called lease rental. It allows asset acquisition with low initial investment.

Factoring is a financial service where a business sells its accounts receivable (bills) to a financial institution, known as a factor, at a discount. This provides the business with immediate cash and transfers the responsibility of debt collection to the factor.

Commercial banks are a vital source of finance, providing funds for different purposes and time periods through cash credits, overdrafts, and term loans. They generally require security against loans.

These are specialized institutions established by the government to provide long-term finance for industrial and economic development. They also provide technical and managerial assistance.

Global Depository Receipts (GDRs) are instruments issued abroad by an Indian company to raise funds in foreign currency. American Depository Receipts (ADRs) are similar but can only be issued and traded in the USA.

The selection of a source of finance depends on various factors such as cost, risk, control, time period, financial stability of the firm, and tax benefits. Businesses often use a combination of sources.