Chapter-7: Sources of Business Finance

Concept of Business Finance

 

Definition: Business Finance involves the procurement and management of funds by businesses for their operations and growth:

 

- Objective: To ensure adequate funds are available for business activities, expansion, and investment.

- Importance: Critical for sustaining operations, capitalizing on opportunities, and achieving long-term goals.

 

 Owner’s Funds

 

1. Equity Shares:

   - Definition: Ownership capital raised by issuing shares to shareholders.

   - Characteristics: Permanent capital, no fixed dividend, voting rights.

   - Example: Reliance Industries issuing equity shares to raise capital for expansion.

 

2. Preference Shares:

   - Definition: Hybrid security with features of both equity and debt.

   - Characteristics: Fixed dividend, no voting rights, preference in liquidation.

   - Example: Tata Motors issuing preference shares to investors seeking stable returns.

 

3. Retained Earnings:

   - Definition: Profits reinvested into the business rather than distributed as dividends.

   - Characteristics: Internal source of finance, reflects profitability and growth.

   - Example: Infosys retaining earnings to fund research and development projects.

 

 Borrowed Funds

 

1. Debentures and Bonds:

   - Debentures: Long-term debt instruments issued to investors with a fixed interest rate.

   - Bonds: Similar to debentures but issued for a longer tenure and traded in the market.

   - Example: HDFC issuing bonds to finance housing loans.

 

2. Loan from Financial Institutions:

   - Definition: Loans obtained from specialized financial institutions like SIDBI (Small Industries Development Bank of India).

   - Purpose: Funding specific projects, working capital requirements.

   - Example: MSMEs obtaining loans from SIDBI for expansion.

 

3. Loan from Commercial Banks:

   - Definition: Loans provided by commercial banks for various business purposes.

   - Types: Term loans, overdraft facilities, cash credit, export finance.

   - Example: State Bank of India offering loans to businesses for infrastructure development.

 

4. Public Deposits:

   - Definition: Funds raised by companies through deposits from the public.

   - Features: Fixed tenure, fixed interest rate, regulated by RBI guidelines.

   - Example: Mahindra & Mahindra accepting public deposits for financing working capital needs.

 

5. Trade Credit:

   - Definition: Credit extended by suppliers to businesses for purchasing goods/services.

   - Terms: Payment terms negotiated between buyer and seller.

   - Example: Maruti Suzuki obtaining trade credit from component suppliers.

 

6. ICD (Inter-Corporate Deposits):

   - Definition: Short-term deposits placed by one company with another company.

   - Purpose: Temporary surplus funds management.

   - Example: Tata Steel placing ICDs with Tata Motors for short-term liquidity management.

 

7. Factoring:

   - Definition: Financial transaction where receivables (invoices) are sold to a third party (factor) at a discount.

   - Purpose: Immediate cash flow from outstanding invoices.

   - Example: IT companies using factoring services to manage cash flow during project cycles.

 

 References

 

- Reserve Bank of India (RBI). (n.d.). Guidelines on Public Deposits. Retrieved from [https://www.rbi.org.in](https://www.rbi.org.in)

- Securities and Exchange Board of India (SEBI). (n.d.). Debenture Issue Guidelines. Retrieved from [https://www.sebi.gov.in](https://www.sebi.gov.in)

 

This chapter explores various sources of business finance including owner’s funds (equity shares, preference shares, retained earnings) and borrowed funds (debentures, bonds, loans from financial institutions and commercial banks, public deposits, trade credit, ICDs, factoring), providing insights into their definitions, characteristics, examples, and relevance in the Indian business context.