Question 1

What is business finance? Why do businesses need funds? Explain.

Accepted Answer

Business finance refers to the funds and credit employed in the business. It is the money required to start, operate, and expand a business. Businesses need funds for various purposes such as purchasing fixed assets, meeting working capital requirements, expansion, diversification, and meeting day-to-day expenses. — Business finance is essential because it helps in acquiring assets, managing operations, and ensuring smooth business functioning. Funds are needed to buy machinery, pay salaries, purchase raw materials, and invest in new projects.

Question 2

List sources of raising long-term and short-term finance.

Accepted Answer

Sources of long-term finance include equity shares, preference shares, debentures, term loans from banks, and retained earnings. Sources of short-term finance include trade credit, bank overdraft, commercial paper, and short-term loans from financial institutions. — Long-term finance is used for acquiring fixed assets and expansion, while short-term finance is used to meet working capital needs. Different sources cater to these different time frames and requirements.

Question 3

What is the difference between internal and external sources of raising funds? Explain.

Accepted Answer

Internal sources of funds are those which are generated within the business such as retained earnings, sale of assets, and depreciation funds. External sources are those which come from outside the business like equity shares, debentures, loans from banks, and financial institutions. — Internal sources do not create any liability and are cost-effective but may be limited. External sources increase the capital base but may involve interest or sharing of ownership.

Question 4

What preferential rights are enjoyed by preference shareholders. Explain.

Accepted Answer

Preference shareholders enjoy preferential rights over equity shareholders in respect of payment of dividend and repayment of capital. They receive a fixed dividend before any dividend is paid to equity shareholders and have priority in repayment of capital in case of winding up of the company. — Preference shares combine features of equity and debt. The preferential rights reduce the risk for preference shareholders compared to equity shareholders.

Question 5

Name any three special financial institutions and state their objectives.

Accepted Answer

Three special financial institutions are: 1) Industrial Finance Corporation of India (IFCI) - to provide long-term finance to industrial sector; 2) Small Industries Development Bank of India (SIDBI) - to promote and finance small scale industries; 3) Life Insurance Corporation of India (LIC) - to mobilize savings and provide long-term funds for industrial development. — These institutions provide specialized financial services to different sectors and help in economic development by providing necessary funds and support.

Question 6

What is the difference between GDR and ADR? Explain.

Accepted Answer

GDR (Global Depository Receipt) and ADR (American Depository Receipt) are instruments used by companies to raise funds from foreign markets. ADRs are issued in the USA and denominated in US dollars, while GDRs are issued outside the USA and can be denominated in any currency. Both represent shares of a foreign company and are traded on respective stock exchanges. — ADRs and GDRs help companies access international capital markets and investors to invest in foreign companies easily.

Question 7

Explain trade credit and bank credit as sources of short-term finance for business enterprises.

Accepted Answer

Trade credit is a short-term credit extended by suppliers to the business, allowing the business to purchase goods and pay for them later. It is interest-free if paid within the credit period and helps in maintaining smooth operations without immediate cash outflow. Bank credit refers to loans and advances provided by banks to businesses for short-term needs. It includes cash credit, overdraft, and short-term loans. Bank credit usually involves interest payments and requires proper documentation and collateral. — Trade credit helps businesses manage working capital by delaying payments to suppliers, thus easing cash flow. Bank credit provides immediate funds but at a cost (interest). Both are crucial for meeting short-term financial requirements.

Question 8

Collect information about the companies that have issued debentures in recent years. Give suggestions to make debentures more popular.

Accepted Answer

Students should research recent examples of companies issuing debentures, noting the terms, interest rates, and benefits offered. Suggestions to make debentures more popular include offering higher interest rates, providing tax benefits, ensuring timely payment of interest and principal, increasing awareness about debentures as a safe investment, and simplifying the application process. — By studying real cases, students understand practical aspects of debentures. Suggestions focus on enhancing investor confidence and attractiveness of debentures compared to other investment options.

Question 9

Institutional financing has gained importance in recent years. In a scrapbook paste detailed information about various financial institutions that provide financial assistance to Indian companies.

Accepted Answer

Students should collect and paste information about institutions such as Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI), Life Insurance Corporation (LIC), Unit Trust of India (UTI), and commercial banks. Details should include the type of financial assistance offered, eligibility criteria, and examples of companies financed. — This project helps students understand the role of institutional financing in business growth and the variety of financial support available to Indian companies.

Question 10

On the basis of the sources discussed in the chapter, suggest suitable options to solve the financial problem of the restaurant owner.

Accepted Answer

The restaurant owner can consider short-term finance options like trade credit and bank credit for working capital needs. For expansion or modernization, medium and long-term sources such as term loans from banks, issue of debentures, or equity shares can be suggested. Retained earnings can also be used if available. The choice depends on the amount required, cost of finance, and repayment capacity. — Analyzing the financial needs and matching them with appropriate sources helps in effective financial planning and problem-solving for the business.

Question 11

Prepare a comparative chart of all the sources of finance.

Accepted Answer

The comparative chart should include sources such as trade credit, bank credit, public deposits, retained earnings, issue of shares, and debentures. For each source, mention features like nature (short-term/long-term), cost, risk, control, and suitability. For example, trade credit is short-term and interest-free but limited in amount; equity shares provide permanent capital but dilute control; debentures are long-term with fixed interest but no voting rights. — Creating a comparative chart helps in understanding the advantages and disadvantages of each source, aiding in selecting the most appropriate finance option.

Question 12

What is business finance and why is it often referred to as the lifeblood of any business?

Accepted Answer

Business finance is the requirement of funds by a business to carry out its various activities such as production and distribution. It is called the lifeblood of any business because no business can function without adequate funds. For example, funds are needed to buy machinery and pay salaries. — Business finance refers to the money required for different business activities. It is essential because without sufficient funds, business operations cannot start or continue. The initial capital is often insufficient, so additional funds must be raised to meet fixed and working capital needs.

Question 13

Classify the financial needs of a business into fixed capital and working capital with examples.

Accepted Answer

Fixed capital refers to funds invested in long-term assets like land, building, machinery, and furniture. For example, buying a factory building requires fixed capital. Working capital is needed for day-to-day operations like purchasing raw materials, paying wages, and meeting current expenses. For example, buying raw materials on credit requires working capital. — Fixed capital is used to acquire assets that remain in the business for a long time, while working capital is used for current assets and expenses. The amount of working capital depends on factors like credit sales and turnover speed.

Question 14

On what basis are sources of business finance classified? Name and briefly explain each basis.

Accepted Answer

Sources of business finance are classified on three bases: (a) Period basis: classifies sources as long-term, medium-term, and short-term depending on the duration of funds; (b) Ownership basis: classifies sources into owner's funds (capital and retained earnings) and borrowed funds (loans, debentures); (c) Source of generation basis: classifies sources as internal (retained earnings, receivables) and external (loans, debentures). — Period basis relates to the time funds are needed. Ownership basis distinguishes between funds provided by owners and borrowed from others. Source of generation basis separates funds generated inside the business and those obtained from outside.

Question 15

Identify the period classification of the following sources of finance: shares, lease financing, trade credit.

Accepted Answer

Long-term, Medium-term, Short-term — Shares are a long-term source as funds are invested for more than 5 years. Lease financing is medium-term as it is generally for 1 to 5 years. Trade credit is short-term, usually up to one year.

Sources of Business Finance

Sources of Business Finance — Study Notes

8.1 INTRODUCTION

8.2 MEANING, NATURE AND SIGNIFICANCE OF BUSINESS FINANCE

8.3 CLASSIFICATION OF SOURCES OF FUNDS

Practice Questions — Sources of Business Finance

All 11 Chapters in Business Studies