Sources Of Business Finance Class 11 Notes Business Studies Chapter 7 - CBSE

Sources of finance are classified on three bases, i.e., based on the source of generation, based on ownership, and based on a time period.

On the basis of Generation

• Retained Earnings: Retained earnings are a long-term source of finance, also called internal financing. When the company retains a part of profits for emergency use instead of distributing it to the shareholders, it is called retained earnings.
• Trade Credit: Trade credit is the credit given by the trader to another for purchasing goods and services.
  It is a short-term source of finance. It is given to the person only after knowing the purchasing firm's creditworthiness, financial position and goodwill. The time period and volume of the credit are based upon several factors, such as the financial position of the seller, record of payment, degree of competition in the market, goodwill of the purchasing firm, and volume of purchases.
• Factoring: Factoring is a financial service in which a factor carries the burden of collecting the amount from creditors. The company sells all its bills to the factor at a certain discount.
• Lease Financing: Lease financing is an agreement in which the lessor gives the right to the lessee to use its assets for a certain period and at a predetermined amount. After the maturity of the date, the lessee will return back the asset to the lessor or may renew the agreement.

On the basis of Ownership

• Public Deposit: Public deposits are raised by firms directly from the public and which aids them in financing
  medium-term sources. These deposits offer a higher return as compared to bank deposits. Moreover, ownership of the company is not diluted, as the public does not get the right to control it.
• Commercial Paper: Commercial paper is a short-term source of finance and comes under the category of borrowed funds. Creditworthy companies make use of commercial paper to raise short-term finance. In simple terms, it is an unsecured promissory note with a maturity period ranging from 90 days to 365 days. It is issued to banks, pension funds, insurance companies, and business firms and is regulated by the Reserve Bank of India.
• Equity Shares: These shares are part of the owner's funds. The persons with such shares are called shareholders, enjoy voting rights, and participate in decision-making. Therefore, they also bear a higher risk of getting high returns.

On the basis on a time period

• Preference Shares: This type of shareholder has a preferential right over equity shareholders at the time of winding up and at dividend declaration.
• Debentures: Company can raise funds through the issue of debentures. These are called borrowed funds, as one has to pay a fixed interest even at the time of loss. It is a source of long-term capital .