Sources of business finance include Retained Earnings, Commercial Paper, Lease Financing, Debentures, etc. Business Finance can be broadly categorized as Fixed capital requirements and Working capital requirements.
To know more about the Source of Business Finance Class 11 Detail Read below.
Source of Business Finance Class 11 Detail
Here are various sources of Business Finance which are given below
Equity Capital
Preference Share
Debenture/Debt Fund
Retained Earnings
Lease Financing
Trade Credit
Loan from Bank
Public Deposit
Commercial Paper
What is Business Finance 11th Business Studies
Business is concerned with the production and distribution of goods and services to satisfy the needs of the customer. To run the business effectively and efficiently it needs to have a required amount of funds. The requirement of funds in a business to carry out various activities such as the purchase of raw materials, machinery, etc. is called Business Finance.
Business finance is known as the lifeblood of any business. Businesses cannot run unless and until they have the required amount of capital. The contribution of funds by the owner at the initial stage is not sufficient to operate the business smoothly. So financing plays an important role in reaching a breakeven revenue stream
Business Finance can broadly be categorized in the following ways-
- Fixed Capital Requirement
- Working Capital Requirement
Fixed Capital Requirement
Working Capital Requirement
Businesses need a proper infrastructure to commence an operation. To have a proper infrastructure it would be necessary to have a proper building, machinery, furniture, etc. Capital that is required to purchase machinery, furniture, buildings, and other fixed assets is known as the Fixed Capital requirement. The fixed Capital requirement varies from business to business. Trading business requires less fixed capital as compared to manufacturing companies. Likewise, Big company requires huge fixed capital as compared to small companies.
The whole fund cannot be utilized to procure fixed assets, it also needs funds for day-to-day operation. The fund which used for procurement of current assets, bills receivables, and for current expenses such as payment of salaries and wages, etc.
The amount of working capital varies from a different company. Companies that sell goods on credit or have slow sales turnover usually require higher working capital as compared to companies selling goods on a cash basis with or with high sales turnover.
Which are the Main Sources of Ownership Capital Class 11
Ownership Capital is funded by the owner of the company i.e. shareholders such as equity shareholders, and preference shareholders. The owner may also be classified as a sole trader, partner, investor, or equity shareholder. Apart from capital invested by the owner profit earned by the company is reinvested. Owner’s capital remains invested for a longer duration and a company doesn’t need to return. In return, the owner gets the right to control management. The main sources of the owner’s fund are the Issue of Equity shares and Retained earnings.
Issue of share- Capital raised by the issue of shares through the stock market via IPO and FPO is share capital. The capital of a company divided into smaller units is known as shares. Each share has a nominal value.
For eg, A company issue 10,000 shares of Rs10 each for a total value of Rs1,00,000.
The person holding shares in the company is known as the shareholder. There are mainly two types of shareholders. These are Equity shareholders and Preference shareholders. The amount raised by the issue of an equity share is known as an equity share and the amount raised by the issue of a share to a preference holder is known as a preference share.
Retained Earning- The company sometimes does not want to share/distribute its profit in the form of a dividend. The company may retain that portion of profit in the future. This is known as Retained Earnings. Retained earning is also known as ‘Ploughing Back of Profit’.
What are the Sources of Business Finance Class 11
Businesses can raise funds from various sources. Each source has unique characteristics. The business has to identify the best sources of funds depending on the situation of the company. For eg. if a company doesn’t want to dilute its shares then the company raises funds from borrowings.
1. Debenture
Debentures are the most important sources of funds for raising long-term capital. Debenture has a fixed rate of interest and is issued for a fixed tenure. A debenture is an acknowledgment that the company pays the debenture holder a certain sum of amount with interest at a certain period.
There are various types of debenture are-
a). Secure and Unsecured Debenture- Secured Debenture creates a charge on the fixed assets of a company while an Unsecured Debenture does not carry any charges on the fixed assets of a company.
b). Registered and Bearer-The company usually maintains a record of debenture by maintaining the Register of debenture holder registered and where the company does not maintain any register the debenture is unsecured
c). Convertible and Non-Convertible- Debentures can be converted into equity shares known as convertible debenture and that debenture that cannot be converted into equity shares is known as Non-Convertible.
2. Trade Credit
When a supplier sells a product or service to the purchaser without taking Immediate payment. This practice is very famous among suppliers and purchasers. The supplier gives credit options to increase their sales. Such credit appears as a ‘Sundry Creditor’ in the Books of the Debtor(purchaser).
3. Commercial Paper
Commercial Paper is an unsecured promissory note. It was introduced in India in 1990. It is issued for a minimum period of 7 days and a maximum of up to 1 year. This is said to be a short-term financial instrument.
4. Lease financing
It is a contractual agreement between 2 parties where one party transfers the right to use the asset in return for a periodic payment. In other words, it is a renting of assets. The owner of the asset is the ‘Lessor’ and the other party who uses the asset is Known as the ‘Lessee’.
5. Retained Earning
The company sometimes does not want to share/distribute its profit in the form of a dividend. The company may retain that portion of profit in the future. This is known as Retained Earnings. Retained earning is also known as ‘Ploughing Back of Profit’.
6. Public Deposit
Money that is directly raised by the company is known as a public deposit. It can be raised for both short-term and mid-term financial requirements. Public deposit is beneficial for both the depositor and the company. The public gets a higher rate of return as compared to banks and the cost of borrowing from a deposit is cheaper than the cost of borrowing from the bank. Maturity is a maximum of up to 3 years.
Frequently Asked Questions(FAQs)
Sources of Finance is the most important chapter in Business Finance. You can find this topic in Chapter 8 of your notebook for Class 11.
Closing Up
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