Business finance includes all types of funds used in a business, such as owner's funds and borrowed funds. It is required for starting, operating, expanding, and modernizing a business. The amount required varies based on the nature and size of operations. Some key long term sources of finance include equity shares, preference shares, retained profits, debentures, loans from financial institutions and commercial banks. Short term sources include trade credit, advances from customers, discounting bills, bank overdrafts, cash credits and public deposits.

1. Business Finance

2. Concept of Business Finance
 Business Finance: Money required for any activity is known as finance.
Every activity whether economic or non-economic, requires money to run it.
 Characteristics of business finance:
• business finance includes all types of funds used in
business (e.g. owner’s fund, borrowed funds).Includes all types of funds
• business finance is required in all types of organizations
whether large or small, manufacturing or trading.
Required in all types of
organizations
• the amount of business finance differs according to the
nature and size of business operations.
Varies with nature and size
of business operations
• the amount of business finance varies from time to time.Varies from time to time
• it is required on continuous basis during the life of the
business organization
Required on continuous
basis

3. Significance of business finance
 Finance is required not only to start the business but also to operate it, to expand
or modernize its operations and to secure stable growth.
 The need for business finance arises for the following purposes
• every business organization whether manufacturing or trading needs finance to acquire some
fixed assets.
To acquire fixed assets:
• manufacturers need finance to acquire raw materials and consumable stores for production.
To purchase raw materials:
• manufacturers need finance to pay their workers, supervisors, managers and other staff
employed by them.
To acquire services of human being:
• every organization needs finance to meet day to day other operating expenses.
To meet other operating expenses:

4. Significance of business finance
• with fast changing technology, business organizations need finance to modernize their
plants & machineries, production methods and distribution methods.
To adopt modern technology:
• every organization needs finance to meet the ups and downs of business and unforeseen
problems.
To meet contingencies:
• every organization needs finance to expand its existing operations.
To expand existing operations:
• every organization which decides to diversify, needs finance to add new products to the
existing line.
To diversify:
• finance is required to avail business opportunities. For example, where raw materials are
available at heavy cash discount
To avail business opportunities:

5. Sources of finance

6. Sources of raising finance

7. Long term Sources of Finance
1. Equity shares
2. Preference shares
3. Retained profits
4. Debentures
5. Loans from financial institutions
6. Loans from commercial banks
7. Venture capital funding
8. Lease financing

8. Equity shares
 The capital raised through equity shares is called equity share capital and the
person who contributes money through equity shares are called equity
shareholders.
 The cost of capital of this source is high because the shareholders usually
expect a higher rate of return on their investments.
 Merits of equity share capital from the point of view of company:
1. Permanent capital
2. No fixed obligations
3. No security
4. Enhances the capacity to raise further debt
5. No risk of financial insolvency
6. Right issue

9. Equity shares
 Limitations of equity share capital from the point of view of company
1. Voting rights
2. High dividend
3. Bonus shares
4. Capital appreciation
 Limitations of equity share capital from the point of view of shareholders
1. Uncertainty of earnings
2. High risks
3. Inability to participate in the management
4. No security
5. No control over increase in rate of dividend

10. Preference Shares
 A preference share is one which carries the following rights:
1. A right to receive dividend at a fixed amount before any dividend is paid to equity
shares.
2. A right to receive repayment of capital on winding up of the company, before the
capital of equity shareholders is returned.

11. Kinds of Preference Shares
Cumulative preference shares
Non-cumulative preference share
Participating preference shares
Non-participating preference share
Convertible preference share
Non-convertible preference share
Redeemable preference share

12. Preference Shares
 Merits of preference share capital from the point of view of company
1. Dividend not charged
2. No risk of loss of control
3. No risk of financing insolvency
4. Low cost
5. Advantage of trading on equity
 Limitations of preference share capital from the point of view of company
1. Costs higher than that of debt
2. Not permanent capital
3. Not attracts many investors

13. Preference Shares
 Merits of preference share capital from the point of view of shareholders
1. Preferential rights as to the payment of dividend
2. Preferential right as to the repayment of capital
3. No reduction in dividend
4. Accumulation of dividend
5. Redeemable
 Limitations of preference share capital from the point of view of shareholders
1. No voting rights
2. No capital appreciation
3. No increase in dividend

14. Retained Profits
 Retained Profits: that portion of the profit which is not distributed but is
retained and reinvested in the business is known as retained profits.
 Advantages of using retained profit.
1. No explicit cost
2. More dependable
3. No fixed obligation
4. Not affect control
5. No security
 Limitations of using retained profits
1. Available only to profitable companies
2. Involves opportunity cost

15. Debentures
 Debentures: a debenture is a written instrument acknowledging a debt and containing
provisions as regards to the repayment of principal and the payment of interest at a fixed
rate. Following are the features of Debentures
1. Fixed interest- the rate of interest payable on debentures is fixed and is
payable on the face value of the debentures.
2. No voting rights- the debenture holders do not enjoy voting rights except at their
class meetings. They do not have rights to elect directors and to participate in
the management.
3. Redeemable- the debentures are redeemable during the life of the company

16. Kinds of Debentures
Naked or unsecured debentures
Secured debentures
Redeemable debentures
Irredeemable debentures
Convertible debentures
Non-convertible debentures

17. Debentures
 Merits of debentures from the point of view of the company
1. Low cost- the cost of debt is lower than the cost of equity shares
2. No risk of loss of control
 Limitations of debentures from the point of view of the company
1. Risk of financial insolvency
2. Security
3. Increases risk of shareholders

18. Long term Loans form Financial Institutions
 Long term loans represent secured borrowing for a period normally exceeding 5 years and
at present it is the most important source of finance for new projects.
 These loans are generally repayable over a period of 6 to 10 years in annual, semiannual
or quarterly instalments.
 Merits of long term loans
1. Low cost
2. Advantage of trading on equity
 Limitations of long term loans
1. Risk of financial insolvency
2. Security
3. Interference with management
4. Long processing time

19. Loans from Commercial Banks
 Loans are raised by companies from commercial banks against the security of
assets.
 The banks do not interfere with the management of the company.
 Such loans can be repaid in parts and interest can be saved to that extent.

20. Venture Capital Financing
 the venture capital financing refers to the financing of new high venture
promoted by qualified entrepreneurs who lack experience and funds to give
shape to their ideas.
 Methods of venture capital financing
1. Equity financing
2. Conditional loan
3. Participating debentures
 Royalty Financing
 In a royalty financing arrangement, a business receives a specific amount of money from
an investor or group of investors.

21. Lease Financing
 A lease is an agreement whereby the owner of an asset grants to the user the
right to use an asset for payment of periodic rentals over agreed period of time.
 Lessor: a lessor is a person or entity who owns the asset and who grants the
right to use the asset for payment of periodic rentals over agreed period of time.
 Lessee: a lessee is a person or entity who acquires the right to use the asset from
the owner of the asset for a payment of periodic rentals over agreed period of
time.
 Classification of lease
1. Financial lease are long term non-cancellable leases where all risks as to the asset
are borne by the lessee and all returns of the asset are enjoyed by the lessee.
2. Operating leases are short term, cancellable leases where the risk of obsolescence
is borne by the lessor and annual maintenance cost is also borne by the lessor
unless contract provides otherwise.

22. Other Long term sources of fund
 Open ended and close ended lease A lease is said to be an open ended lease when
the lessee has the option of purchasing the leased asset at the end of lease period.
 International Financing: There are various avenues for a multi-national
organization to raise funds either through internal or external sources. Internal funds
comprise share capital, loans from parent company and retained earnings. Now a days
external fund can be raised from a number of sources, as follows;
1. Commercial Banks
2. Development Banks and Financial Institutions
3. International Agencies

23. Short Term Sources of Finance
1. Trade credit from suppliers
2. Advances from customers
3. Discounting bills of exchange
4. Bank overdraft
5. Cash credit
6. Letter of credit
7. Certificate of deposit (CD)
8. Public deposits

24. Short Term Sources of Finance
 Trade credit: Trade credit refers to an arrangement whereby the suppliers of raw
materials, components, stores and spare parts, finished goods, allow the customers to
pay their outstanding balances with the credit period allowed by them.
 The availability of trade credit depends up on various factors
 Nature and size of the firm
 Status of the firm (i.e. creditworthiness),
 activity level of the firm,
 Policy of trade credit,
 Prevailing economic conditions etc.

25. Short Term Sources of Finance
 Advances from customer
 Advances from customers also act as source of short term finance. The
availability of advances from customers depends up on various factors such as
type of goods and creditworthiness of supplier etc.
 Discounting bills of exchange
 When goods are sold on credit, the suppliers generally draw bills of exchange
up on customers who are required to accept the same. The term of such bills of
exchange may be three to six months.

26. Short Term Sources of Finance
 Bank overdraft
 Refers to an arrangement whereby the bank allows the customers to overdraw
from the current account within a specified limit.
 Cash Credit
 Cash credit refers to an arrangement whereby the bank allows the borrowers to
draw money from time to time within a specified limits (known as cash credit
limit).
 Letter of Credit
 A letter of credit is the guarantee by the buyer’s bankers to the seller that in the
case of default or failure of the buyer, the bank shall make the payment to the
seller.

27. Short Term Sources of Finance
 Public deposits
 Public deposits are raised by companies by inviting their shareholders,
employees and the general public to deposit their savings with the companies.
 Merits of Public Deposits from the Point of View of Company
1. No security- the deposits are not required to be covered by securities by way of
mortgage, etc.
2. Easy invitation- the deposits can be easily invited by offering a rate of interest
higher than the interest on bank deposits.
 Certificate of Deposit (CD): Certificate of deposit is a document of title similar to a
time deposit receipt issued by a bank except that;
1. There is no prescribed rate of interest.
2. Banker is not required to encash the deposit before maturity period.