RBSE Class 11 Business Studies Notes Chapter 5 Business Capital/Finance

Rajasthan Board RBSE Class 11 Business Studies Notes Chapter 5 Business Capital/Finance

→ Business Finance — The money required for business activities is called business
finance.

Need and Importance of Business Finance

To purchase fixed assets.
To meet the daily expenses.
To meet contingent liabilities and for expansion.
Bridging the gap between production and sales.
To grab market opportunities.

Classification of Sources of Business Finance On the basis of period

Short term finance — It is required to meet the day to day expenses. It is required for a period not exceeding one year.
Medium Term finance — It is required for modernization, sales promotion, innovation in business. It is taken for a period ranging between 1 to 3 years.
Long term finance — It is required for making investment in fixed assets. It is required for more than 5 years.

On the basis of Ownership

Owner’s fund — The funds contributed by the owners of the company. These owners can be a sole properitor, partners, shareholders of a company.
Borrowed funds — These funds are raised by taking loans and credit by the firm.

On the basis of source of generation

Internal Source — Funds generated from within the organization.
External Source — Funds generated from outside the organization.

Sources of short term finance

Trade Credit — Credit extended to business by other traders to purchase inventories without making immediate payments.
Bank Credit — Loans provided by commercial banks to business firms.

Bank Credit includes

Loans and advances
Cash credit
Bank overdraft
Discounting of Bills

→ Customer Advances — The businessman can take some advance from his customers against the order of goods given. This is called customer advance.

→ Factoring – It is a financial service under which a business firm sells its book debts to a certain value to a factor who takes the responsibility of debt collection on behalf of the business firm.

→ Loan from unorganized sector — It includes indigenous bankers, money lenders, friends, relatives who provide loans on personal security.

→ Public Deposits — The amount deposited by the public with the company for a specified period at the predetermined ROI is called public deposit.

Long-term Financial Resources

Issue of shares – The capital raised by issuing shares is known as share capital.
These are of 2 types :

Equity Shares – Preference shares
Equity Shares – A share which is not a preference share is an equity share.

Merits of Equity Shares

No compulsory dividend is required to be paid to equity shareholders.
Equity capital is a permanent source in business.
Assets can be pledged to raise funds for long term borrowings.
These shares can be easily marketed in the capital market.
The credibility of company is affected.

Demerits of Equity Shares

Return on these shares is not regular and guaranteed.
The risk is high for shareholders.
There is not much profiteering in this.
Compliance of legal formalities causes delay in getting funds.

(i) Preference Shares — These are the shares which enjoy a fixed rate of return and get preferential or special priority while receiving dividends/repayment of capital at the time of liquidation.

Convertible and Non—convertible.
Cumulative and non—cumulative.
Participating and non—participating.
Redeemable and non—redeemable.

Merits of Preference Shares

Regular income is earned.
Shareholders get preferential rights to capital repayment.
There is no dilution of control of management for equity shareholders.

Demerits of Preference Shares

The rate of dividend is usually higher than rate of interest on loans.
The dividends are paid only when the company earns profit.
The fixed ROI restricts the investors from enjoying higher profitability.

Debentures :
These are the common securities under borrowed fund capital. Following are the types of Debentures

Redeemable and non-redeemable debentures.
Convertible and non-convertible debentures.
Secured and unsecured debentures.
Registered and Bearer debentures.
Zero Percent Interest debentures.

Merits of Debentures

Debenture financing does not result in dilution of control of equity shareholders.
Debenture holders do not have a share in profits of the company.
Debenture holders do not get voting rights.
Debenture holders have the priority of refund of their loan prior to shareholders.

Demerits of Debentures

Payment of interest is a fixed obligation of the organization whether it is earning profit or incurring loss,
Provision of Payment is compulsory, even when the company is facing financial crisis.
Every company has limited capacity to borrow. Excessive issue of debentures may reduce the company’s capacity to borrow more funds in the future.

Institutional Debt/Finance — To provide long-term finance to business organization, the central and the state governments have established various specialised financial Institutions. These institutions also provide marketing/technical services, consultancy, guidance and assistance to new business enterprises in their formation, expansion and modernization.

Introduction of Specific Financial Institutions
Industrial Finance Corporation of India

It was established in the year 1948.
The main objective of IFCI is to provide medium and long -term credit to eligible industrial concerns,
It provides loan for a duration of maximum 25 years.
In June 1993, it was given the name Industrial Finance Corporation Limited (IFCI).

Industrial Credit and Investment Corporation of India

This bank was established in 1955.
Its objective is to provide long term loans upto a period of 15 years.
On 3rd May 2002, ICIC, was merged with ICICI Bank Ltd.

Industrial Development Bank of India (IDBI)

This bank was established in 1964.
It works as a fully owned subsidiary of RBI to provide financial support to all the industrial concerns without any restrictions.
In October 2004, this bank was converted into a commercial bank and after its merger with Industrial Development Bank of India, its name has been changed to IDBI.

Industrial Investment Bank of India

This bank was established as a primary agency for the rehabilitation and revival of sick and weak industries.
It is also known as Industrial Reconstruction Bank of India.
It was reconstituted as Industrial Reconstruction Bank of India in 1985 under the IRBI Act 1984 and as Industrial Investment Bank of India Ltd. in March 1997.

Small-Scale Industry Development Bank

It was established in the year 1990.
It is an apex Institution providing financial assistance to small-scale industries.

State Finance Corporation

To provide financial assistance to all types of Industrial concerns.
The government of India passed the State Financial Corporation Act in 1951, empowering the state govt, to establish these development banks for their respective regions.

Life Insurance Corporation of India

LIC was established in 1956.
It is to promote insurance business.
It also provides loans to public enterprise.

General Insurance Corporation of India

GIC was established by government in 1973 by nationalisation of general insurance business.
It invests its funds in securities and subscribes shares and debentures of companies.

Unit Investment of India

It was established in 1964.
It plays an important role by mobilizing public savings under US-64 and master shares plan.

Export-Import Bank of India

It was established in January 1982.
It works as an apex bank in the field of foreign exchange financing.
It works as the International cell of Industrial Development Bank of India.

Venture Capital Fund Institutions

The concept of venture capital was developed in the year 1986-87.
The venture capital fund institution provides seed capital and managerial assistance to those entrepreneurs who want to apply their R&O projects in business enterprise.

Retention of funds — Usually, a company does not distribute its entire profits as dividend to shareholders, rather a part of profit is retained to be used for future growth prospects and for other future uses.

Lease Financing — Lease is a contract wherein the owner of an asset grants the other party the right to use the asset in return for a periodic payment. It is suitable and popular for those assets where technological changes are common.

International Financial Resources Foreign Loan

Under these loans commercial and service loans are included, which can be obtained at concessional rate of interest with long term maturity.
Their main sources are export credit agencies like EXIM bank, Japan Export – Import Bank, UK Export Credit and Guarantee Corporation and other government and multidimensional agencies.

Foreign Investment

In India, foreign investment is found is the form of foreign direct investment.
Foreign Direct investment means subscription of participation in shares and debentures of Indian companies by foreign investors.
Foreign Investors bring technical knowledge and modern technical know-how.

Non-Resident Indians

The persons of Indian origin who live in foreign countries are called XRIs.
These are the sources for long-term finance in India.
The share of NRI deposits in foreign capital is more than 30%.

Business Capital/Finance Class 11 RBSE Notes Important Terms

• Finance – This refers to the money required for business activities. So. the money required and the different sources of raising this money to achieve business objectives of the business enterprise is finance.

• Owned Capital — The owners may be sole proprietor, partners, shareholders of the company. It refers to the funds contributed by owners as well as the accumulated profits of the company.

• Borrowed Capital — Borrowed capital refers to fund raised by taking loans and credit by the firm. It includes loans from commercial banks, financial institutes, issue of debentures, public deposits and trade credit.

• Fixed Capital — The establishment of finance, and the capital required to purchase the capital is called fixed capital.

• Working Capital – Current assets including stock of the raw materials, products, recievables, etc. and daily expenditures like salary, wages, tax, rent. etc. are included in working capital.

• Long Term Sources — Funds required for more than 5 years are known as long term finance. Long term finance is required for making investment in fixed assets and to meet permanent needs of the business.

• Medium Term Sources – The finance taken for a period ranging between 1 to 3 years.
Example- public savings, loans from financial Institutions, etc.

• Short Term Sources — The sources of investment which fulfil the requirement for less than one year.

• Restrictive Conditions — The terms applied by the financial conditions while applying for loans, like stop on payment of dividend.

• Fixed Charge funds — Those financial sources for which a fixed rate per annum has to be paid for their usage are called fixed charge funds.

• Burden on Assets – The loans which are obtained by mortgaging the personal assets, meaning, if the loans are not given on time then the lending institutes can sell out those property and receive the amount.

• Voting Rights – The rights of stockholders given to them so that they can take some important decisions.

• Trade Credit — The loan provided by one businessman to another for the goods and products exchanged between them.

• Bank Credit – An agreement between banks and borrowers where banks trust a borrower to repay the funds plus interest for a loan.

• Cash Credit – This is a procedure where bank obtains a security and then the business enterprise can continuously withdraw funds from the bank upto a certain specified amount.

• Bank Overdraft – The current account holders with the bank can withdraw a specified amount over and above his actual deposits in the bank.

• Retention of Funds — A company does not distribute its entire profits as dividend to shareholders, rather a part of profit is retained to be used for future growth prospects and for various other future uses.

• Factoring — It is a financial service under which a business firm sells its book debts to a factor at a certain value, who takes the responsibility for debt collection on behalf of the business firm.

• Public Deposits — The amount deposited by the public with the company for a specified period at a predetermined rate of Interest.

• Share — A part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute.

• Equity Shares — If the shareholders are not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, the share capital will be treated as equity share capital.

• Preference Shares – The shares which enjoy a fixed rate of return and get preferential or special priority while recieving dividends or payment of capital at the time of liquidation.

• Debentures — These are the intruments for raising long term debt capital.

• Accounts Recievables — The money owed to a company by its debtors.

• Bills Discounting — An accept draft sold for early payment to a bank or credit institution at less than face value
after the bank deducts fees and applicable interest charges.

• Global Depository Receipts — The shares that are held by a foreign branch of an international bank. The shares
trade as domestic shares but are offered for sale globally.

• American Depository Receipts — It is a receipt that is a negotiable security that represents securities of a non – US company that trades in the U.S. financial markets.

• Foreign Currency Convertible Bonds – It is a convertible bond issued in a currency different than the issuer’s domestic currency. This is the money being raised by the issuing company in the form of a foreign currency.