case study on sources of business finance class 11

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Class 11 Business Studies Case Study Questions

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For students appearing for grade 11 CBSE exams from the Commerce stream, Business Studies is a fundamental subject. Business Studies is considered to be quite interesting as well as an occupying subject as compared to all other core subjects of the CBSE class 11 commerce stream. To ace this CBSE exam, students are not only required to work hard but they ought to learn to do smart work too.

Among all the other core subjects of the Commerce stream i.e accountancy, economics and business studies, Business Studies is the one that is purely theoretical. It is termed to be comparatively easier and more scoring than the other mandatory subjects of the commerce stream. Many students who opt for the commerce stream after their 10-grade exams desire to learn in-depth about the business organizations and their work, for them the subject is of utmost importance. Business Studies is an essential component of the class 11 commerce stream curriculum.

In order to ace the subject the student needs to have conceptual clarity. CBSE has designed the syllabus for class 11 Business Studies so as to provide students with a basic understanding of the various principles prevalent in the Business organizations as well as their interaction with their corresponding environment.   

Case Study Questions in class 11 (Business Studies)

Case-based questions have always been an integral part of the Business Studies question paper for many years in the past. The case studies have always been considered to be challenging for the students, for such questions demand the application of their knowledge of the fundamental business concepts and principles. Last year i.e-  2021 CBSE introduced a few changes in the Business Studies question paper pattern to enhance and develop analytical and reasoning skills among students.

It was decided that the questions would be based on real-life scenarios encountered by the students.CBSE not only changed the way case-based questions were formulated but also incremented their weightage in the Business Studies question paper. The sole purpose of increasing the weightage of case-based questions in the class 11 curriculum by CBSE was to drift from rote learning to competency and situation-based learning.

What is a case study question? (Business Studies)

In Business Studies, a case study is more like a real-world test of how the implementation works. It is majorly a report of an organization’s implementation of anything, such as a practice,a product, a system, or a service. The questions would be based on the NCERT textbook for class 11 Business Studies. Case-based questions will definitely carry a substantial weightage in the class 11 Business Studies question paper. questions.

A hypothetical text will be provided on the basis of which the student is expected to solve the given case-based question asked in the Business Studies class 11 exam. Initially, the newly introduced case-based questions appeared to be confusing for both the students and the teachers. Perhaps, they were reluctant to experiment with something new but now a lot more clarity is there that has made the question paper quite student-friendly.

Case study questions could be based on any chapter or concept present in the NCERT textbook. Thus, it is expected from the students to thoroughly revise and memorize the key business fundamentals. 

Business Studies syllabus of class 11 CBSE   

The entire Business Studies course is divided into 2 parts:

• Part A, Foundation of Business
• Part B, Finance and Trade

The class 11 Business Studies exam is for a total of 100 marks, 80 marks are for the theory and the remaining 20 for the project. Most of the questions are based on the exercises from the NCERT textbook. It is recommended to rigorously go through the contents of the book. A single textbook has been published by NCERT for Class 11 Business studies. There are a total of 10 chapters in this book divided into 2 parts. 

CBSE Class – 11

Business Studies (Code No. 054)

Theory: 80 Marks Time: 3 Hours Project: 20 Marks

Case Study Passage (Business Studies class)

As part of these questions, the students would be provided with a hypothetical situation or text, based on which analytical questions will have to be answered by them. It is a must for the students to read the passage in depth before attempting the questions. In the coming examination cycle (2022-23), case-based questions have a weightage of around 30%. These questions can be based on each chapter in the NCERT book for Business Studies, grade 11.

Students must prepare well for the case-based questions before appearing for their Business Studies exam as these questions demand complete knowledge of the various concepts in their syllabus. CBSE plans to increase the weightage of such questions in the upcoming years.

Sample case-based Questions in Business Studies

Business Studies as a subject provides a way of perceiving and interacting with the business ecosystem. It is a core subject of the commerce stream that is purely theoretical and relevantly easier than the other compulsory subjects of the stream. Class 11 Business Studies syllabus is closely related to trade and commerce. The subject cannot be ignored as it is the foundation of many concepts and theories which are studied at an advanced level in class 12.

The case-based questions asked in the CBSE Business Studies question paper for class 11 are of two types:

As per the latest circular issued by CBSE on Assessment and Evaluation practices of the board for the session 2022-23, CBSE has clearly mentioned that competency-based questions including case studies will be different from subjective questions.  

The questions can also be categorized on their difficulty level:

• Direct: such questions can be easily solved. Their answer is visible in the given passage itself.
• Indirect/ Analytical: such questions are confusing and tricky. These can be solved by the application of the theory or principle that is highlighted in the provided text. 

How To Prepare For Case-based Questions? (Business Studies grade 11)

Students need to prepare well for the case-based questions before appearing for their class 11 Business Studies exam. Here are some tips which will help the student to solve the case-based questions at ease:

• Read the provided text carefully
• Try to comprehend the situation and focus on the question asked
• Analyze and carefully answer the question asked
• In general, the passage given would be lengthy in Business Studies case-based questions but their solutions are comparatively short and simple
• One can significantly save time if they follow a reversal pattern, that is going through the questions before reading the comprehensive case study passage.
• Answer in a concise manner
• One should concentrate on solidifying key fundamental principles/theories
• Go through the NCERT textbook in depth. The language used is crisp and simple.
• While providing solutions to the case-based question, pick the keyword/keyline based on which you are driving insights.

 In order to excel in the Business Studies class 11 exam, one needs to ignore the shortcut techniques and get to read the NCERT textbook rigorously. Case studies can be easily solved if your key fundamentals are strong and clear. The best part of having these questions is that the asked question itself projects a hint of its answer. These simple points if kept in mind will definitely help the students to fetch good marks in case study questions, class 11 Business Studies. 

Case study question examples in Business Studies

Here a re some given case study questions for CBSE class 11 Business Studies. If you wish to get more case study questions and other study material, download the myCBSEguide app now. You can also access it through our student dashboard.

Business Studies Case Study 1

Read the hypothetical text given and answer the following questions:

Manish, Rahul and Madhav live in the same locality. They used to meet and discuss their ideas. After discussing the recent fire breakout in their area, they decided to take fire insurance for their house or work area. Manish gets his house insured against fire for ₹1 lakh and during the policy period, his house gets damaged due to fire and the actual loss amounts to ₹2.5 lakh. The insurance company acquired the burning material and approved his claim. Rahul gets his godown insured against fire for ₹1 lakh but does not take enough precautions to minimize the chances of fire like installing fire extinguishers in the factory. During the policy, a fire takes place in his godown and he does not take any preventive steps like throwing water and calling the employees from the fire fighting department to control the fire. He suffered a loss of ₹1,20,000. Madhav took a fire insurance policy of ₹20 lakh for his factory at an annual payment of ₹24,000. In order to reduce the annual premium, he did not disclose that highly explosive chemicals are being manufactured in his factory. Due to a fire, his factory gets severely damaged. The insurance company refused to make payment for the claim as it became aware of the highly explosive chemicals.

How much can Manish claim from the insurance company?

• None of the above

How much compensation can Rahul get from the insurance company?

Which principle is violated in the case of Rahul?

• Insurable Interest
• Utmost Good Faith

How much amount is the insurance company liable to pay to Madhav if he files a case against it?

• Insufficient information

Which principle of Insurance is violated by Madhav?

• Insurable interest
• Subrogation
• Proximate Cause

The insurance company acquired the burnt material and approved his claim. Which principle of Insurance is highlighted in the given statement.

• (a) Mitigation
• (a) Utmost Good Faith
• (d) Subrogation

Business Studies Case Study 2

 Sarthak Electronics Ltd. has a loss of Rs 15,00,000 to pay. They are short of funds so they are trying to find means to arrange funds. Their manager suggested a claim from the insurance company against stock lost due to fire in the warehouse. He actually meant that they can put their warehouse on fire and claim from insurance companies against stock insured. They will use the claim money to pay the loan.

• Will the company receive a claim if the surveyor from the insurance company comes to know the real cause of fire?
• Write any two Values which the company ignores while planning to arrange money from false claims.
• State any three elements of fire insurance

Business Studies Case Study 3

OLX and qickr are examples of well-known websites used to conduct business. Tarasha’s sofa set got spoiled in the rain. Her friend suggested that she should change the fabric so that it looks new and put it for sale on Olx. Tarasha followed her friend’s advice and got her sofa repaired so that it looked better and uploaded nicely clicked pictures on the website without disclosing the fact that it was damaged from the inside. She found a buyer and sold it for Rs 10,000. After five days the buyer found the real state of the sofa set and called Tarasha but she did not answer any of the calls.

• identify the type of business highlighted in the above case.
• Identify any two values which are overlooked by Tarasha.
• Explain any two benefits and limitations of e-business.

Advantages of case study questions in Business Studies

Class 11 Business Studies syllabus is not very vast but has to be focussed upon as it forms the base for your 12th grade Business Studies syllabus. Students are supposed to prepare themselves thoroughly from the NCERT textbook. The Case-based questions prominently focus on the real and current scenarios of the Business world. Approximately 30% of the question paper will comprise case study questions that demand high-order thinking and reasoning skills from the students. The students ought to practice class 11 Business Studies case-based questions from the various options available to them, so as to excel in the subject.

• Enhance the qualitative and quantitative analysis skills of students
• Provides an in-depth understanding of the key Business theories/concepts
• Inculcate intellectual capabilities in students
• Help students retain knowledge for a longer period of time
• The questions would help to discard the concept of rote learning
• Case studies promote and strengthen practical learning.

“Failure is success if you learn from it”

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• Class 11th /

Class 11 Sources of Business Finance

• Updated on  
• Mar 22, 2021

What are the sources of business finance? The sources of business finance can vary from long-term funds to medium-term and short-term funds. Class 11 Business Studies comprises an important chapter on the Sources of Business Finance focuses on the integral features and characteristics of financial investment and management for a business organisation. While setting up a business, it is essential to accumulate funds for it. If you want to do well in this chapter, you must be through with the basics of the business world as well as financial concepts. Through this blog, we aim to present you with all the key pointers as well as the study notes on class 11 sources of business finance.

This Blog Includes:

What is business finance, need for business finance, sources of business finance, period basis sources of business finance, ownership basis of business finance, sources of business generation, retained earnings, trade credits, lease financing, public deposits , equity shares, preference share, class 11 sources of business finance project.

The term ‘finance’ can simply be elaborated as money or fund and when combined with business, it means that business finance refers to the funds needed for the operations of a business. This is because a business cannot really function without enough funds and finances.

Finance is an integral component of every business. Let us have a look at some of the pointers as per class 11 sources of business finance:

• Starting a business requires money to purchase goods or setting up shop somewhere. This is called the Fixed Capital Requirement.  
• You need sources of working capital for everyday operations. This is called the Working Capital Requirement
• Expansion/Diversification of products and operations require funds
• Finance is an essential part of an enterprise’s growth, and you cannot grow your business without paying close heed to your financial sources

Here are all the sources of Business Finance as per this chapter in Class 11:

Sources of Business Finance as per the basis of period

• Equity shares
• Preference Shares
• Loan from Financial Institutions
• Loan from Banks
• Public Deposits
• Trade Credit
• Commercial Paper

Sources of Business Finance on the Basis of Ownership

• Loans from Banks
• Loans from Financial Institutions
• Commercial Papers

Sources of Business Finance on the Basis of Sources of Generation

• Financial Institutions
• Preferences Shares

As derived from class 11 sources of business finance, based on period, business finance can be further divided into three classes:

Long-Term Fund These sources sustain the finances of business for more than five years. Sources of long term financing are equity shares, debentures & loans.

Medium-Term Funds When the funds are needed for less than five years. Medium-term funds can be secured through borrowings from commercial banks, public deposits, and shorter loans.

Short-Term Funds The period of these funds should not exceed one year. Some short fund sources are trade credit or loans and commercial papers.

Depending upon the types of fund a business gets, the funds can be classified into two sets- ‘owner’s funds’ and ‘borrowed funds’.

Owner Funds If the funds are provided by the business or shareholders or partners’ creator, then it is the Owner’s funds. Profits used to invest again in the business also fall under this. Owner funds usually do not need to be refunded and remain invested in the business’s life period. Two important sources of owner funds include Equity shares and Retained earnings. This type of investment grants controls over the enterprise. It carries risk with the investment as the principal amount and returns are not guaranteed.

Borrowed Funds If the investment source comes from outside the business, it is called Borrowed funds. It cannot be a permanent source of capital because it has to be returned. Even though it carries less risk because the principal and returns are guaranteed, it does not grant control. A fixed interest rate is also levied on borrowed funds, and it can put a lot of burden to payback when the company/business is not raising enough funds.

Whilst one is planning to obtain funding for their ongoing or upcoming business, the class 11 sources of business finance also provides the major sources of finance generation you should know:

• Internal Sources: Funds that get generated within the business can be controlled by management as an investment. It can be used in emergencies as well
• External Sources: Funds that get generated out of business. There is no control over these funds by management. They can be a good source of finance for entrepreneurs

Business Studies Class 11 chapter on Sources of Business Finance also familiarizes students with various sources to raise funds. It is important to understand that there is no one perfect source, and depending on your requirements & needs, your financial sources should fit the mould. Here are some of the most important ones.

Factors Affecting the Choice of Sources of Fund 

Now that we have discuss the various sources of funds, latest take a look at some of the factors that affect the choice of sources of fund- 

• Time period and purpose 
• Effect on credit worthiness 
• Operations stability and financial strength
• Risk profile 
• Tax benefits
• Flexibility and is
• Form of legal status and organisation
• Control 

Out of the company’s total earnings, a certain section of the total profits can be saved for the future. This part is not divided among shareholders and is a source of self-financing. It depends heavily on the net profits and age of the organization.

Merits A permanent source of funds without any explicit cost. It allows free panning of options for the investors as funds are internal. The eventual increase in equity share value is a possibility.

Limitations It might cause internal conflict if done improperly. It becomes an unreliable source due to fluctuating profits .

Trade credits refer to sources of short term finances where a business extends credit for purchasing goods and services to the other. According to class 11 sources of business finance chapter, it appears as a record for an account payable and isn’t taken immediately. It is based on goodwill and a decent financial situation. 

Merit It is very convenient and cultivates trust. It promotes the sales of the business. Allows inventory expansion avenues. No interest rate levied on the charge.

Limitations Limits the transaction usually done for short-term needs. It can induce reliability on convenience and may cause over-indulgence.

Factoring 

It is referred as a financial service within which the ‘ factor’ provides various services like-

• Discounting the bill as well as collecting clients’ debt through which the receivables on the account of sales of goods or services will be sold to the factor at a variable discount. 
• It also provides information about the creditworthiness of the prospective clients, etc. along with very factors that possess information regarding the trading history of the firm. 

Merits:  Obtaining points through factoring is cheaper as compared to bank credits. With the fluent cash flow through factoring, clients are able to meet their liabilities. It doesn’t create any charge on the assets of the firm. 

Limitations:  Factoring is expensive when the bills are higher in number and smaller in amount. The advance Finance that factor forms receive is generally levied at higher interest than usual rates. Sometimes, third party customers do not feel comfortable dealing with this. 

Now that you are familiar with the major aspects of short-term financial sources, let us understand lease financing. A periodic payment is set up between two parties allowing the temporary use of an asset owned by another company. This also allows the renting of assets. A fixed periodic amount is called lease rental. The asset is returned after the contract time. 

Merits Usually, a lower investment gives Lessee the right to an asset than buying it would take. Lease rentals are deductible by taxes. No debt raising capacity is accounted into the agreement.

Limitations Restrictions on asset usage. If the lease arrangement breaks down, it can hurt the business operation of Lessee. The Lessee can never own the asset.

When an organisation raises certain deposits directly from the public, it is known as public deposits. Usually, the rate of interest offered on public deposits is higher than that offered on the bank deposits. Those who are interested in investing in an organisation, they can do so by filling the Vantazo designated form. 

Merits:  The process for obtaining deposits is simpler as compared to loan agreements. As compared to the cost of borrowing from banks and other financial institutions, the cost of public deposits is lower. They do not create any charge on the assets of the organisation. 

Limitations:  It is difficult for new companies to find funds through public deposits. As compared to other sources, public deposits are unreliable sources as the public may not respond in the right way when the money is needed by the organisation.

Issue of Share

Also known as share capital, where capital is divided into small marketable units known as shares. Each share gets a variant value fixed at one point. According to sources of business finance chapter class 11, there are two types of share, i.e., Equity Share and Preference Shares. Let us take a detailed look at the key features of Equity Shares and Preference Shares.

• A most important form of the sources of long term financing
• They fall under ownership capital and represent a share in the company
• They are essential conditions for making a company. Stakeholders are paid on the profits of the company, thus also called ‘residual owners.’
• They get the right to management in the company and make them liable up to the point of their contribution to capital raised

Merits No compulsory payment of dividends required. Permanent capital lasting lifetime of the company till the liquidation. Equity capital is a reliable judging criterion for loan providers and other investors. No charge on assets of the company in the creation of equity funds. The voting and management powers gained are very important.

Limitations No fixed/steady income guaranteed. The initial amount to be invested in the equity share is higher than other fundraising options. A complicated fundraising method not suitable for quick funds.

• Preferential Position receives a fixed cut in dividends out of the profit. At the time of liquidation, they enjoy a later claim to capital.
• They get the first preference in repayment and dividend. They have a fixed rate of return, like debentures that you will learn about in detail in Business studies class 11.

Merits According to class 11 sources of business finance chapter, the primary merit is to get a cut and a steady income. No voting rights mean no liability. In good times they get a higher rate of dividend. Even in liquidation, they have a preference. No charge levied against the assets.

Limitations Not suitable for risk-takers. The rate of dividend is higher than the rate of interest on debentures. No assured return if the company doesn’t gain profit. No tax saving.

Thus, we hope that through this blog about class 11 sources of business finance, we have helped you have a clear idea about the chapter. If you are exploring the best courses in Business Studies and Finance after 12th, our Leverage Edu experts are here to assist you. We will help you find an ideal course and university as per your interests and preferences thus ensuring that you take an informed decision to embark on the next phase of your academic journey! Sign up for a free career counselling session with us today!

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• Important Questions for CBSE Class 11 Business Studies Chapter 8 - Sources of Business Finance

CBSE Class 11 Business Studies Chapter-8 Important Questions - Free PDF Download

Free PDF download of Important Questions with Answers for CBSE Class 11 Business Studies Chapter 8 - Sources of Business Finance prepared by expert Business Studies teachers from latest edition of CBSE(NCERT) books. Register for Online tuition on Vedantu.com to score more marks in CBSE examination.

Study Important Questions for Class 11 Business Studies Chapter 8 - Sources of Business Finance

Very short answer questions (1 mark).

1. What do you mean by ploughing back of profits?

Ans: When a company earns profit, a certain amount or percentage of those profits is retained within the business for future use and this is known as retained earnings. When the business is financed through this source it is known as ploughing back of profit or internal financing.

2. Differ between ADR & GDR.

Ans: The difference between GDR and ADR is:

3. State the difference between lessor and lessee with the help of an example.

Ans: The 'lessor' is the person who owns the assets, while the 'lessee' is the person who uses them. Hence, the real owner of the asset is the lessor, while lessee is the temporary owner for the asset.

For example, Amul Dairy Ltd bought machinery from Jindal and Co. on a hire buy arrangement and paid Rs 200000 in lease fees. The lessee is Amul Diary Ltd, while the lessor is Jindal and Co.

4. What type of share capital is also called ‘’Risk Capital”

Ans: Risk capital is another name for equity share capital.

5. Name the return given to debenture holders for using their funds?

Ans: Debenture holders receive a fixed rate of interest for the use of their funds.

6. Name the one unique feature of ‘’Retained Earnings’’ which is not available in any other source of finance?

Ans: It is a self-sustaining source of income with no upfront costs. Retained earnings refers to a percentage of net earnings that is kept in the business for future usage.

7. What is the similarity between ADR and Public Deposits?

Ans: Depositors do not have voting rights in either ADR or Public Deposit, and the company's control is not eroded in both the cases.

8. Which term is concerned with the acquisition and conservation of capital funds in meeting the financial needs of a business enterprise.

Ans: The acquisition and conservation of capital money to meet financial needs is the focus of retained earnings.

9. Name the organization which has been set up by the central as well as State governments to provide medium term and long term loans to the business sector.

Ans: Developmental banks lend to businesses on a medium and long-term basis.

10. Write any one similarity between Equity share capital and preference share capital.

Ans: They are included in the owner's capital.

11. Write the names of 2 Indian companies that offer Factoring services.

Ans: SBI Factors and Commercial Services Ltd., Canbank Factors Ltd., are two Indian companies that provide factoring services.

Short Answer Questions                                        (3 or 4 Marks)

12. What preferential rights are enjoyed by preference shareholders?

Ans: Preference shareholders have the following preferred rights:  

Preference in Dividend: They receive dividends at a fixed rate, and dividends on these shares are paid before dividends on equity shares.

Preference in Repayment: When a corporation closes, preference shares are paid out first, followed by equity shares.

Excess Profits: Preference shares have the right to partake in any excess profits that remain after equity shares have been paid.

Preference in case of dissolution: They have the preference over equity shareholders in the share capital refund in the event of company dissolution.

13. What factors influence the working capital need in a business? write any three

Ans:  The factors influencing the working capital need in a business are:

Nature of Business: Manufacturing business requires more working capital as compared to trading business or service provider.

Business Cycle: During boom period firms require a large amount of working capital to manage the increased sales and production.

Seasonal Factors: Seasonal businesses require more working capital during their season time.

Scale of Operations: Businesses operating on a large scale require larger amounts of working capital as compared to small business firms.

Credit Allowed: A business extending a longer credit period to its buyers will need more working capital as compared to a business doing cash business or offering a lesser credit period.

Production Cycle: Businesses with longer production cycles require more working capital as compared to businesses with short-term production cycles.

Credit Availed: A business organisation receiving longer credit period from their supplier will require lesser working capital as compared to business purchases goods for cash or receive short credit period.

14. Define Share and write any two advantages of it.

Ans: A company needs huge investments to start a business, this amount is known as capital. Since, it is impossible for one individual to bring in such a huge amount of capital, the entire capital is divided into small units known as shares, where each person holding shares is referred to as a shareholder.

It serves as permanent capital as it has to be repaid at the time of liquidation.

Democratic control over the management of the company is given to shareholders through voting rights.

Equity capital establishes a company's creditworthiness and gives prospective loan providers trust.

15. Write any two differences between share and debentures.

Ans: The difference between shares and debentures are:

16. Write any three limitations of equity share capital.

Ans: The three limitations of equity share capital are:

The returns are fluctuating in nature so investors who need steady income may not prefer equity shares.

Cost of raising funds from equity shares is quite high as compared to other sources.

It is more of a complicated process and may take longer time to raise funds.

The issuance of additional equity shares dilutes current equity shareholders' voting power and earnings.

17. Write any three advantages of Retained Earnings

Ans: The Merits of Retained Earnings are:

No initial fees: These funds are not subject to any explicit fees, such as floatation costs or interest, because they are raised internally.

Positive share price: A large quantity of retained earnings can cause the price of equity shares to rise.

Loss Absorption: Because these are surplus profits retained in the business, they serve to mitigate the impact of unanticipated losses.

Long answer Questions                                                (5 or 6 Marks)

18. Explain trade credit and Factoring as a source of finance for a business enterprise.

Ans: Trade Credit

It refers to the extension and provision of credit by one one trader to another for the purchase of goods and services, or other supplies without on the spot payment.. 

This is generally used by organizations as short term financing. The terms of trade credit may vary from person to person based on past records and from industry to industry based on industry norms.

A continuous and a convenient source of funds.

It is readily available if credit worthiness is known to the seller.

It helps in increasing the inventory levels in case of increase in sales volume.

While providing funds, It does not create a charge on assets of the firm .

Limitations

There can be chances of over-trading.

Fulfils only limited financial needs.

Costly in comparison to few other sources.

This is a financial service in which a third party, namely factor, renders various services like discounting of bills and collection of clients' debts.  In this  a company gives the responsibility of the collection of debts from the debtors to the factor.  Also, through factoring large amounts of information can be fetched about trading history of the organization, the credit worthiness of debtors etc.

There are two methods of factoring: 

Recourse Factoring: Factor does not assume the credit risk.

Non-recourse factoring: Factor assumes and takes responsibility for the entire credit risk in case the debtor defaults.

A cheaper source of finance as compared to other means such as bank credit.

The organization is relieved from the task of collection of bad debt.

Protection against bad debts to the firm in case of non-recourse factoring

At times, the factor also provides finance to the company, that is he makes advance payment of the debts taken by him to the firm.

It is flexible and does not create charge on assets of the firm.

It can be an expensive source, if there are a number of invoices of smaller amounts.

Customers may not feel comfortable dealing with a third party(factor).

The advance loan supplied by the factoring firm is normally accessible at a higher interest rate.

19. Discuss the various international sources from where the funds can be generated.

Ans: Organizations can raise funds in a variety of ways on a global scale. 

Commercial Banks

Commercial banks throughout the world issue foreign currency loans for business purposes. Banks offer different forms of loans and services depending on the country. These banks act as an important source of financing to non-trade international operations. They extend their support all over the world for foreign currency loans. For example: Standard Chartered.

International Agencies and Development Banks

They provide medium to long term loans for the development of economically backward areas of the world. These are set up by the governments of various developed countries. Example: EXIM Bank and Asian Development Bank (ADB).

International Capital Markets

Various MNCs and corporate houses depend on borrowings in the form of rupees and other foreign currency. A company's local currency shares are sent to the depository bank. Depository receipts are issued by the depository bank in exchange for these shares. The financial instruments used for the same are:

Global Depository Receipts: A GDR is a negotiable instrument or an instrument that can be traded freely in various foreign capital markets. These are issued by the Indian companies to raise funds from abroad and can also be traded on foreign stock exchanges.

American Depository Receipts: This instrument is issued by the American companies and can be traded in American markets. It can be issued to only citizens of America and can only be traded in US stock exchanges.

Indian Depository Receipts: IDRs are issued to Indian residents only and can be traded on Indian Stock Exchange. It is denominated in Indian Rupees. It is issued by an Indian Depository to enable foreign companies to raise funds from Indian Capital Markets. Standard Chartered PLC was the first company to issue IDRs.

Foreign Currency Convertible Bonds (FCCBs): As the name suggests, FCCBs are those bonds or securities which have an option to be converted into equity or depository receipt after a certain span of time. It is generally done at a predetermined rate or exchange rate. It has a fixed rate of interest and is issued in a foreign currency. It resembles the convertible debentures in India.

20. From which source a firm can raise long-term funds as loans when not provided by a commercial bank? Discuss its merits.

Ans: Financial Institutions

There are numerous financial institutions established by the government of India across the country.  These institutions finance the businesses and are set up by both state and central governments. There are development banks especially established to promote industrial development in the country.

Provide long term funds which are not provided by the commercial banks 

Provide various services such as managerial advice, financial and technical advice to the companies.

Increases the goodwill of the borrowing company in the capital markets. 

Funds can be made available even at the time of contingency and can be paid in easy installment without being a burden to the company.

21. What do you mean by owner’s fund? When it is not suitable?

Ans: Funds provided by the owners of the organization are known as Owners' funds. It includes profits that are reinvested into the business. The important sources of owners' funds are 

Retained earnings 

Issue of equity shares.

The non-suitability of using owner’s funds is based on the following factors:

Dilution of Control: The choice of what source from which financing has to be procured also depends upon the extent to which firm is ready for the dilution of control. Such as if existing equity shareholders aren’t willing to dilute the control they enjoy, in such a case the company may issue finance from sources other than equity share capital.

Tax Advantages: Some sources of finance are tax deductible, and hence firms can enjoy tax advantage using those sources. For example interest on debentures is a tax deductible expense, hence firms wanting to enjoy tax benefits may go for these sources. In such a situation, using the owners' fund is not suitable.

Cost: There are two types of costs: the cost of obtaining funds and the cost of putting these funds to use. Both of these costs should be considered when deciding on a funding source. If the cost of the owner's fund exceeds the prospective returns, it should not be issued.

Cash Flow Position: Before raising finance business must consider the projected flow to ensure that it has sufficient cash to pay fixed cash obligations.A company with high liquidity and a good cash flow position can issue debt capital, as the company will have less chances of facing financial risk than the company with a low cash position.

Purpose and time frame: The business should plan for the time frame in which the finances are needed. A short-term requirement, for example, can be addressed by borrowing cash at a low-interest rate via trade credit, commercial paper, or other means. Long-term financing is best accomplished through the issuance of shares and debentures.

Stock Market Conditions: If the stock market is flourishing, and there is a condition of boom then the companies may prefer more equity over debt in the capital structure. However, in the case of a bear market, to avoid any more risks, the companies will prefer more debt over equity in the capital structure.

Ease of issuance of finance: The flexibility and ease with which the firm is able to procure finance also affects the choice of source of finance. Excessive documents, legal restrictions, heavy investigation and other reasons may discourage the company from using a particular source of finance. Hence, if the issue of such a source is difficult, the firm should not go for it.

22. Write the main advantages and disadvantages of Public Deposits.

Ans: Public deposits:  

Organizations raise public deposits from the general public to fund their short- term and medium-term financial needs. The interest rate on these deposits is usually higher than the interest rate on bank deposits. If a person wishes to invest in a business (by making a deposit), he or she must complete and submit a required form together with the deposit. The organization issues a deposit receipt as a mark of debt acknowledgment in exchange for the money borrowed.

Merits of Public Deposits:

Minimal Restrictions: Accepting public deposits as a means of raising funds is a straightforward process with minimal restrictions.

Low cost: The cost of raising funds through public deposits is generally lower than the cost of borrowing money from a commercial bank.

No dilution of control: There are no voting or management rights for depositors. As a result, accepting public deposits does not affect the business's ownership structure.

Demerits of Public Deposits:

Restricted financing: The quantity of money that may be raised from public deposits is restricted because it is dependent on the availability of capital and people's desire to invest in the company in question.

Not suitable for new firms: Because people have little faith in new businesses, it is difficult for them to raise capital through public deposits.

23. Comment on the following sources of International finance 

(i) I.D.R. 

Ans: An Indian Depository Receipt (IDR) is a financial instrument in the form of a Depository Receipt that is denominated in Indian Rupees. An Indian Depository creates it for a foreign firm to raise capital from the Indian securities market. IDRs are issued to Indian residents in the same way that domestic shares are issued, according to SEBI norms. Residents can bid in the same style and technique as they can for Indian shares when the issuer company makes a public offering in India.

(ii) F.C.C.B

Ans: FCCB (Foreign Currency Convertible Bonds) are debt securities with an equity component that can be converted into equity or depository receipts after a set length of time. FCCB holders can choose to convert their bonds into equity shares at a predetermined price or exchange rate or keep the bonds. They have a fixed interest rate that is lower than any other non-convertible debt instrument with a similar interest rate. FCCBs are listed on overseas stock exchanges and traded there.

24. ‘ ’Ojas Auto Ltd. ‘’ is a very well-known auto company in the industry having more equity share capital than long term debt in its capital structure. It is willing to expand and establish a new unit in the backward region and wants to train the tribal women in skill Development to empower them. It has a huge amount of cash reserve of Rs. 1000 crores.

(a) What is the status of the capital structure of the above company?

Ans: The company's financial structure is robust, with more equity share capital than long-term debt in its capital structure and a large cash reserve.

(b) According to you, which source of finance should be used by the company in establishing new units? Give any two reasons in support of your answer.

Ans: As the company has huge cash reserves with itself, it should use retained earnings, or the self-financing technique for the establishment of new unit

When a company earns profit, a certain amount or percentage of those profits is retained within the business for future use and this is known as retained earnings. When the business is financed through this source it is known as ploughing back of profit or internal financing. Retained earnings is a percentage of net earnings that is kept in the business for future usage.

(c) What values does the company exhibit in the above case?

Ans: The following values are displayed by the company:

Balanced Regional Development : The company is willing to expand and open new units in underdeveloped areas, and it contributes to regional development.

Women Empowerment: The company intends to empower indigenous women by training them in skill development.

25. ‘ ’Avika Ltd.’’ company, an IT giant company registered in India wants to top the huge amount of resources for its growth and expansion from U.S.A. for long term needs. It also needs money for a period of fewer than 3 years to meet its medium cum short term needs. The company is following the practice of educating and giving employment to underprivileged youth. 50% of its office electricity is generated through solar power. 

(a) Which two sources of finance should be used by the company to meet its requirement. Write any two characteristics of each source.

Ans: ADR and Public Deposits can be used to satisfy the company's needs.

Public Deposits : Public deposits are deposits that are raised directly from the public by organizations. While depositors receive a greater interest rate than banks, the cost of deposits to the company is lower than the cost of bank borrowings. RBI is in charge of regulating it. Companies typically solicit public contributions over a three-year term.

ADR (American Depository Receipt): This instrument is issued by the American companies and can be traded in American markets. It can be issued to only citizens of America and can only be traded in US stock exchanges. This instrument is like a regular stock which is purchased and sold in American markets. 

(b) What values does the company exhibit in the above case?

(Hints- ADR and Public Deposits, Employment Generation, Concern for the environment)

Ans: The following values are demonstrated by the company:

Environmental stewardship: The company uses solar power to generate 50% of its office electricity. As a result, resources are conserved.

Employment Generation: The company is committed to teaching and employing underprivileged youngsters, hence creating job possibilities for them.

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Sources of Business Finance Class 11 Notes: CBSE 11th Business Studies Chapter 8, Download PDF

Cbse class 11 sources of business finance revision   notes: find attached revision notes for cbse class 11 business studies chapter 8, sources of business finance. a pdf download link has also been attached for the same..

Sources of Business Finance   Class 11 Notes: Revision Notes are essential study materials used by students to prepare for their examinations. They can be self-made or referenced. Though it is advised by professors and experts that notes are better if prepared by oneself, we understand that it becomes difficult to take time out for preparing notes, in today’s busy life. Thus, to ensure that students have the best study materials for preparation for examinations, we have brought to you Revision Notes for CBSE Class 11 Business Studies Chapter 8, Sources of Business Finance.\

Reference links for other important study materials have also been attached below for your convenience. Going through chapters and solving exercise questions is not enough and most importantly is a hazardous task. Thus, study materials are prepared for students so that they gain a sufficient amount of knowledge related to important chapters and subjects before they appear for their examinations.

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Revision Notes for CBSE Class 11 Business Studies Chapter 4

Revision Notes for CBSE Class 11 Business Studies Chapter 5

Revision Notes for CBSE Class 11 Business Studies Chapter 6

Revision Notes for CBSE Class 11 Business Studies Chapter 7

Revision Notes for CBSE Class 11 Business Studies Chapter 8 are presented below:

Financial needs of a business

• Fixed Capital Requirements - In order to start a business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures. This is known as the fixed capital requirements of the enterprise.
• Working Capital Requirements - No matter how small or large a business is, it needs funds for its day-to-day operations. This is known as the working capital of an enterprise, which is used for holding current assets such as stock of material, bills receivables, and for meeting current expenses like salaries, wages, taxes, and rent.
• Period basis - On the basis of the period, sources of funds can be classified into three parts: long-term, medium-term, and short-term. The long-term sources fulfill the financial requirements of an enterprise for a period exceeding 5 years and include sources such as shares and debentures, long-term borrowings, and loans from financial institutions. Where the funds are required for a period of more than one year but less than five years, medium-term sources of finance are used. Short-term funds are those which are required for a period not exceeding one year.
• Ownership basis - On the basis of ownership, the sources can be classified into ‘owner’s funds’ and ‘borrowed funds’.Owner’s funds means funds that are provided by the owners of an enterprise, which may be a sole trader or partners or shareholders of a company.‘Borrowed funds’ on the other hand, refer to the funds raised through loans or borrowings. The sources for raising borrowed funds include loans from commercial banks, loans from financial institutions, issues of debentures, public deposits, and trade credit.
• Source of generation basis - In this sources are categorized on the basis of whether the funds are generated from within the organization or from external sources. Internal sources of funds are those that are generated from within the business. External sources of funds include those sources that lie outside an organization, such as suppliers, lenders, and investors.

Sources of Finance

1.Retained earnings - The retained portion of the net earnings, that hasn’t been distributed amongst the shareholders, is called retained earnings.

• Retained earnings are a permanent source of funds available to an organisation
• It does not involve any explicit cost in the form of interest, dividend or floatation cost
• As the funds are generated internally, there is a greater degree of operational freedom and flexibility
• It enhances the capacity of the business to absorb unexpected losses
• It may lead to an increase in the market price of the equity shares of a company
• Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends
• It is an uncertain source of funds as the profits of the business are fluctuating
• The opportunity cost associated with these funds is not recognised by many firms. This may lead to sub-optimal use of the funds.

2.Trade Credit - Trade credit is the credit extended by one trader to another for the purchase of goods and services.

• Trade credit is a convenient and continuous source of funds
• Trade credit may be readily available in case the credit worthiness of the customers is known to the seller
• Trade credit needs to promote the sales of an organisation
• If an organisation wants to increase its inventory level in order to meet the expected rise in sales volume in the near future, it may use trade credit to, finance the same
• It does not create any charge on the assets of the firm while providing funds.
• The availability of easy and flexible trade credit facilities may induce a firm to indulge in overtrading, which may add to the risks of the firm
• Only a limited amount of funds can be generated through trade credit
• It is generally a costly source of funds as compared to most other sources of raising money

3.Factoring - It is a financial service under which factor renders services such as discounting of bills and providing information about the credit worthiness of prospective clients etc.

• Obtaining funds through factoring is cheaper than financing through other means such as bank credit
• With cash flow accelerated by factoring, the client is able to meet his/her liabilities promptly as and when these arise
• Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from credit sales. It provides security for a debt that a firm might otherwise be unable to obtain
• It does not create any charge on the assets of the firm
• The client can concentrate on other functional areas of business as the responsibility of credit control is shouldered by the factor
• This source is expensive when the invoices are numerous and smaller in amount
• The advance finance provided by the factoring firm is generally available at a higher interest cost than the usual rate of interest
• The factor is a third party to the customer who may not feel comfortable while dealing with it.

4.Lease Financing - It is a renting of an asset for some specified period. The owner of the assets is called the ‘lessor’ while the party that uses the assets is known as the ‘lessee’.

• It enables the lessee to acquire the asset with a lower investment
• Simple documentation makes it easier to finance assets
• Lease rentals paid by the lessee are deductible for computing taxable profits
• It provides finance without diluting the ownership or control of business
• The lease agreement does not affect the debt-raising capacity of an enterprise
• The risk of obsolescence is borne by the lesser. This allows greater flexibility for the lessee to replace the asset
• A lease arrangement may impose certain restrictions on the use of assets. For example, it may not allow the lessee to make any alteration or modification to the asset
• Normal business operations may be affected in case the lease is not renewed
• It may result in higher payout obligation in case the equipment is not found useful and the lessee opts for premature termination of the lease agreement
• The lessee never becomes the owner of the asset. It deprives him of the residual value of the asset.

5.Public Deposits - The deposits that are raised by organizations directly from the public are known as public deposits.

• The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement
• The cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions
• Public deposits do not usually create any charge on the assets of the company. The assets can be used as security for raising loans from other sources
• As the depositors do not have voting rights, the control of the company is not diluted.
• New companies generally find it difficult to raise funds through public deposits
• It is an unreliable source of finance as the public may not respond when the company needs money
• Collection of public deposits may prove difficult, particularly when the size of deposits required is large.

6.Commercial paper - Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

(i) A commercial paper is sold on an unsecured basis and does not contain any restrictive conditions

(ii) As it is a freely transferable instrument, it has high liquidity

(iii) It provides more funds compared to other sources. Generally, the cost of CP to the issuing firm is lower than the cost of commercial bank loans

(iv) A commercial paper provides a continuous source of funds. This is because their maturity can be tailored to suit the requirements of the issuing firm. Further, maturing commercial paper can be repaid by selling new commercial paper

(v) Companies can park their excess funds in commercial paper thereby earning some good return on the same.

Limitations:

(i) Only financially sound and highly rated firms can raise money through commercial papers. New and moderately rated firms are not in a position to raise funds through this method

(ii) The size of money that can be raised through commercial paper is limited to the excess liquidity available with the suppliers of funds at a particular time.

(iii) Commercial paper is an impersonal method of financing. As such if a firm is not in a position to redeem its paper due to financial difficulties, extending the maturity of a CP is not possible.

7.Equity shares - Equity share capital is a prerequisite to the creation of a company. Equity shares represent the ownership of a company and thus the capital raised by the issue of such shares is known as ownership capital or owner’s funds.

• Equity shares are suitable for investors who are willing to assume the risk for higher returns
• Payment of dividends to the equity shareholders is not compulsory. Therefore, there is no burden on the company in this respect
• Equity capital serves as permanent capital as it is to be repaid only at the time of liquidation of a company. As it stands last in the list of claims, it provides a cushion for creditors, in the event of the winding up of a company
• Equity capital provides credit worthiness to the company and confidence to prospective loan providers
• Funds can be raised through equity issues without creating any charge on the assets of the company. The assets of a company are, therefore, free to be mortgaged for the purpose of borrowings, if the need be
• Democratic control over the management of the company is assured due to the voting rights of equity shareholders.
• Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns
• The cost of equity shares is generally more as compared to the cost of raising funds through other sources
• The issue of additional equity shares dilutes the voting power and earnings of existing equity shareholders
• More formalities and procedural delays are involved while raising funds through the issue of equity shares.

8.Preference Shares - The capital raised by the issue of preference shares is called preference share capital.

• Preference shares provide reasonably steady income in the form of a fixed rate of return and safety of investment
• Preference shares are useful for those investors who want a fixed rate of return with comparatively low risk.
• It does not affect the control of equity shareholders over the management as preference shareholders don’t have voting rights
• Payment of a fixed rate of dividend to preference shares may enable a company to declare higher rates of dividend for the equity shareholders in good times
• Preference shareholders have a preferential right of repayment over equity shareholders in the event of the liquidation of a company;
• Preference capital does not create any sort of charge against the assets of a company
• Preference shares are not suitable for those investors who are willing to take risks and are interested in higher returns
• Preference capital dilutes the claims of equity shareholders over assets of the company
• The rate of dividend on preference shares is generally higher than the rate of interest on debentures. As the dividend on these shares is to be paid only when the company earns profit, there is no assured return for the investors. Thus, these shares may not be very attractive to the investors
• The dividend paid is not deductible from profits as an expense. Thus, there is no tax saving as in the case of interest on loans.

9.Debentures - The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date.

• It is preferred by investors who want fixed income at lesser risk
• Debentures are fixed-charge funds and do not participate in the profits of the company
• The issue of debentures is suitable in the situation when the sales and earnings are relatively stable
• As debentures do not carry voting rights, financing through debentures does not dilute control of equity shareholders on management
• Financing through debentures is less costly as compared to the cost of preference or equity capital as the interest payment on debentures is tax deductible.
• As fixed charge instruments, debentures put a permanent burden on the earnings of a company. There is a greater risk when the earnings of the company fluctuate
• In the case of redeemable debentures, the company has to make provisions for repayment on the specified date, even during periods of financial difficulty
• Each company has a certain borrowing capacity. With the issue of debentures, the capacity of a company to further borrow funds reduces.

10.Commercial Banks - Banks extend loans to firms of all sizes and in many ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and the issue of letters of credit commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods.

• Banks provide timely assistance to businesses by providing funds as and when needed by it.
• Secrecy of business can be maintained as the information supplied to the bank by the borrowers is kept confidential
• Formalities such as the issue of prospectus and underwriting are not required for raising loans from a bank. This, therefore, is an easier source of funds
• The loan from a bank is a flexible source of finance as the loan amount can be increased according to business needs and can be repaid in advance when funds are not needed.
• Funds are generally available for short periods and their extension or renewal is uncertain and difficult
• Banks make a detailed investigation of the company’s affairs, financial structure, etc., and may also ask for the security of assets and personal sureties. This makes the procedure of obtaining funds slightly difficult
• In some cases, difficult terms and conditions are imposed by banks. for the grant of a loan. For example, restrictions may be imposed on the sale of mortgaged goods, thus making normal business working difficult.

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Important Questions for CBSE Class 11 Business Studies Chapter 8 – Sources of Business Finance

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Sources of Business Finance Class 11 Important Questions for Business Studies Chapter 8

Business studies focus on coordinating teams of people to accomplish specific creative and productive goals, primarily to generate revenue. Business studies is broad and offers a variety of employment options. The eighth chapter in the Class 11 Business Studies  is Sources of Business Finance which deals with   the various sources to finance a business. This chapter covers concepts such as meaning, nature and importance of Business Finance, various sources of Business Finance, merits, and limitations of various sources of Business Finance, international sources of Business Finance, and factors that affect the choice of an appropriate source of finance and more. It carries significant weightage in the Business Studies syllabus. Students can easily access all this and more on the Extramarks website.

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In business studies, a momentary memory lapse can sometimes be covered up by basic common sense. This is one subject that requires constant reading and revision. We at Extramarks understand the importance of solving questions. Our business studies subject matter experts have prepared a repository of resources, such as the NCERT Textbook, NCERT Exemplar, other reference books, past years’ exam papers, and so on. Business Studies experts at Extramarks have created step-by-step solutions to help students better understand each chapter with in-depth explanations so that they don’t have to refer to other reference books and while away their valuable time. Students can register with Extramarks and access Chapter 8 Class 11 Business Studies Important Questions and revise their syllabus quickly and be confident ahead of the exams.

Apart from Business Studies Class 11 Chapter 8 Important Questions, materials like NCERT Solutions, CBSE revision notes , past year question papers, and NCERT books, students can find solutions to all their queries on the Extramarks website.

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Sources of Business Finance Class 11 Questions and Answers

Extramarks subject experts have developed a list of Class 11 Business Studies Chapter 8 Important Questions from numerous sources. These questions and solutions help students better grasp Sources of Business Finance. 

Given below are a few Important Questions from Class 11 Business Studies Chapter 8 and their Solutions:

Q1. What is the difference between GDR and ADR? Explain.

Answer. GDR or Global Depository Receipts: Shared receipts from depository banks for company shares. GDR are quickly convertible into shares at any moment and are marked in US dollars. They are eligible for listing and trading on all international stock markets.

ADR or American Depository Receipts: These receipts, issued by US-based businesses, are exchanged on the market like other securities. The central limiting aspect is that US persons may only purchase these receipts, and trading is only permitted on the US Securities Market.

Q2. What is Business Finance? Why do Businesses need funds? Explain.

Answer. A company’s ability to raise the capital it needs to function is what is known as business finance.

Finance is essential to business for three key reasons:

• To buy equipment, land, buildings, and other fixed assets (Fixed capital requirements).
• The smooth running of the business’s daily activities (Working capital requirements)
• Expansion, development, and diversification.

Q3. Write the advantages of sharing and define them.

Answer. A corporation needs a significant investment, or capital, to launch a business. Since it is difficult for a single person to raise such a significant sum of money, the total sum is divided into fractional units called shares, and everyone who owns shares is referred to as a shareholder.

Some advantages of shares are:

• It acts as permanent capital since it must be paid back during liquidation.
• Shareholders’ voting rights give them democratic power over how the business is run.
• Establishing a company’s creditworthiness and instilling confidence in potential lenders is done through equity capital.

Q4. Explain trade credit and bank credit as sources of short-term finance for business enterprises.

Answer. Trade Credit: It describes granting credit to another trader for acquiring products, services, or other commodities without immediate payment.

Organisations typically utilise this as short-term finance. Depending on prior performance and industry norms, trade credit conditions might differ from person to person and from industry to industry.

Advantages of Trade Credit:

• A reliable and practical source of money.
• If the vendor is aware of your creditworthiness, it is easily accessible.
• In the event of a surge in sales volume, it aids in raising inventory levels.
• Supplying cash does not place a charge on the company’s assets.

Limitations of Trade Credit:

• Overtrading has a chance to happen.
• Only meets a few of your financial necessities.
• Expensive compared to some other suppliers.

Bank Credit: Bank credit refers to a loan given by a bank to a company. The current economic interest rate often determines the bank’s loan interest rate. The borrower must mortgage assets with the bank to secure the loan.

Advantages of Bank Credit:

• The business is conducted in secrecy.
• Underwriting is a more straightforward funding source, and prospectus issuance requirements are unnecessary.
• Because the loan amount may be adjusted based on the borrower’s business needs, bank credit affords the borrower flexibility.

Limitations of Bank Credit:

• The funds are often only accessible for a certain period and renewing them becomes challenging and risky.
• Because banks need security assets before making such loans, the corporation could need to hold onto assets as collateral.
• The terms and restrictions that banks impose can occasionally be rather tricky.
• The conditions set by banks are usually very restrictive; for instance, a bank may restrict the borrower’s ability to sell assets mortgaged to it.

Q5. Name any three financial institutions and state their objectives.

Answer. Unit Trust of India: Unit Trust of India, sometimes known as UTI, was created in 1964 due to the Unit Trust of India Act of 1963. The purpose of establishing UTIs was to encourage saving and available direct funds toward investments in successful companies.

Life Insurance of India: The Life Insurance Corporation of India, also known as LIC, was established in 1956 due to the LIC Act, which nationalised all existing insurance firms. The goal is to promote saving as insurance premiums and invest it in the form of loans to industrial units.

Industrial Finance Corporation of India: Under the terms of the Industrial Finance Corporation Act, 1948, the Industrial Finance Corporation of India, often known as IFCI, was founded. Its goal was to support balanced regional development and inspire business owners to investigate emerging economic areas. It contributed to the development of management education.

 Q6. Describe the concept of finance and the role it plays in business.

Answer. Business is concerned with producing and distributing products and services to meet societal requirements, highlighting business finance’s importance. Business needs money to carry out a variety of tasks. Business is fuelled by finance.

No business entity can conduct its activities successfully without the appropriate amount of money available at the appropriate cost and timing. The creation and sale of services and goods are not feasible without funding.

A business enterprise’s success is mainly dependent on this. Based on how it raises, uses, and distributes its funding. Finance is essential in business.

• For launching a business.
• For carrying out current operations and the purchase of current and fixed assets.
• For corporate modernisation, development, and expansion.

Due to the growth in firm size, adoption of capital-intensive practices, lack of funding, and escalating competitiveness, business finance has become more critical in modern business.

The advantages of having adequate finance  for a commercial enterprise are as follows:

• The business can timely pay its liabilities. Payment of debts on time helps in improving credit status. Consequently, the business may readily borrow money as needed.
• The company can seize commercial chances. For instance, it can pay less for supplies when purchased in bulk.
• The company can do operations without any hiccups.
• The company might upgrade the effectiveness of its operations by replacing its equipment and machinery in due time.
• The company may handle recessions, trade cycles, and other crises more confidently and readily.
• With the development and growth of the firm, more fixed and working capital is needed. Sometimes more money is needed to upgrade the technology being used, lowering the cost of operations or manufacturing.

Q7. What is a commercial paper? What are its advantages and limitations?

Answer. Since 1990, India has employed commercial papers, which are unsecured promissory notes. Highly regarded corporate purchasers utilise it as a promissory note. It helps them meet their short-term financial needs and can be granted for any period between seven days and a year. Primary dealers can raise commercial papers, foreign institutional investors (FIIs), non-resident Indians (NRIs), and all-Indian financial institutions.

A single company distributes it to other enterprises, insurance providers, pension funds, and banks. The amount that CP raises is typically relatively large. Because the CP is entirely unsecured, it can only be granted by businesses with a strong credit standing. The Reserve Bank of India governs the issuing of CP.

Advantages of Commercial paper are:

• Commercial paper is provided unsecured; therefore, it has no restrictive limitations.
• It provides more money than alternative sources.
• For the issuing firm, the cost of commercial bank loans is sometimes higher than that of CP.
• Commercial papers offer a steady flow of financing since their maturity may be tailored to the needs of the issuing company.
• Businesses can invest their extra funds in commercial paper and make a healthy profit.

Limitations of Commercial paper:

• Only financially sound and well-rated businesses can utilise commercial papers to raise capital. This strategy is inappropriate for new or modestly rated enterprises since it is insecure.
• The amount of money raised by selling commercial paper is limited.
• Commercial paper is an impersonal type of funding, and it is impossible to prolong its maturity if a firm faces financial difficulties preventing it from redeeming its paper.

Q8. List sources of raising long-term and short-term finance.

Answer. Long-term sources of finance include:

• Preference shares
• Equity Shares
• Retained earnings
• Loans from banks and other financial institutions

Short-term financing sources include:

• Trade credit
• Short-term loans from banks
• Commercial papers

Q9. List any three equities’ share capital limitations.

Answer.  The three limitations on equity share capital are as follows:

• Investors who want a consistent income may not favor equity shares due to the shifting nature of the returns.
• Comparing stock shares to other types of funding, the cost of equity share financing is exceptionally high.
• The procedure is more complex and might take longer to generate money.
• The issue of additional equity shares dilutes present equity owners’ earnings and voting power.

Q10. Discuss the source from which a large industrial enterprise can raise capital for financing modernization and expansion.

Answer. Some options for long-term finance include the following sources:

• Retained earnings: Companies frequently retain a portion of their earnings before distributing dividends to shareholders. As the money is preserved for future use, these undistributed gains are known as retained earnings.
• Equity shares: The ownership capital of a firm is represented by these shares. These investors, known as equity shareholders, have a voice in management and gain from more significant returns during profitable periods. Since payments are made to them only after external obligations or claims have been settled, they are often referred to as the company’s owners or residual owners.
• Bank and other financial institution loans: For a certain length of time, businesses can borrow money from banks and other financial organisations in exchange for a predetermined monthly payment known as interest. Such a loan has a set payback duration at the loan acceptance time.
• Debentures: Long-term debt capital raising financial instruments used by businesses include debentures. They indicate that a company has taken out a loan for a specific sum of money, which it will eventually pay back to the holders of debentures. They are subject to a fixed rate of return and a deadline for debt repayment. The company’s debtors are known as the holders of debentures.
• Preference shares: As the name implies, these shareholders occupy a privileged position about receiving a fixed dividend rate before any payout for equity shareholders and obtaining the capital of liquidation immediately following the payment to the company’s creditors.

Q11. What preferential rights are enjoyed by preference shareholders? Explain.

Answer. The  preferential rights enjoyed by the  preference shareholders are as follows:

• Preference in repayment: Preference shares are distributed first once a corporation dissolves, then equity shares.
• Preference in case of dissolution: In the case of a company’s liquidation, they are given precedence over equity owners for the share capital repayment.
• Preference in dividend: Dividends on these shares are paid before dividends on equity shares and are paid at a predetermined rate.
• Excess profits: After equity shares have been paid out, preference shares are entitled to a portion of any remaining earnings.

Q12. Describe the meaning of lease finance. Briefly describe its advantages and disadvantages.

Answer. In a lease, the owner of the item offers the other party the right to use it for a predetermined time in exchange for payment from the first party. The party using the assets is referred to as the lessee, while the asset’s owner is the lessor.

A crucial tool for the company’s modernisation and diversification is lease finance. Such finance is more frequently used to buy assets like computers and electronic equipment, which become outmoded quickly due to the rapid technological changes.

Advantages of lease-financing are: 

• It makes it possible for the lessee to buy the asset for less investment.
• It offers finance while maintaining full ownership and management of the company.
• The ability of a business to raise debt is unaffected by a leasing arrangement.
• The lesser bears the danger of obsolescence. This gives the lessee more freedom to replace the asset.

Disadvantages of lease financing are:

• Restrictions may be included in a lease agreement to prevent the lessee from changing or modifying the asset.
• If the equipment is not proven beneficial and the lessee ends the lease early, it might result in a more outstanding payback obligation.
• The assets never actually belong to the lessee. He loses the remaining value of the assets as a result.

Q13. Discuss the financial instruments used in international financing.

Answer. Most foreign finance uses these three financial instruments:

• Foreign Currency Convertible Bonds or FCCB: These are debt instruments that, after a set amount of time, may be converted into depository receipts and equity shares. The terms of conversion and price are predetermined and returns on such securities are fixed beforehand and are thus lower than returns on non-convertible securities.
• Global Depository Receipts or GDR: Shared receipts from depository banks for corporate stock. GDR are quickly convertible into shares at any moment and are marked in US dollars. They are eligible for listing and trading on all international stock markets.
• American Depository Receipts or ADR: These receipts, issued by US-based businesses, are exchanged on the market like other securities. The central limiting aspect is that US persons may only purchase these receipts, and trading is only permitted on the US Securities Market.

Q14. What advantages does the issue of debentures provide over the issue of equity shares?

Answer. Long-term debt capital raising financial instruments used by businesses include debentures. They indicate that a company has taken out a loan for a specific sum of money, which it will eventually pay back to the holders of debentures. They are subject to a fixed rate of return and a deadline for debt repayment. Debenture holders are frequently referred to as the company’s creditors.

The advantages of debentures over equity shares are:

• Fixed interest: The interest rate on debentures is fixed. This implies that the corporation is only obligated to pay its debenture holders a set interest rate, regardless of profit. On the other hand, a business that issues shares is compelled to pay dividends to its shareholders. These pay-outs fluctuate according to earnings, the more significant the profit, the higher the dividends.
• No dilution of ownership: When equity shares are issued, the firm’s ownership is diluted. This is true because equity shareholders have the power to vote and own certain shares of the firm. On the other hand, holders of debentures are not considered corporate owners. In other words, they don’t have any ownership or vote rights in the business. Instead, they are only eligible for a certain amount of compensation. Debentures thus have no impact on the ownership structure of the company. As a result, a corporation should issue debentures rather than stock shares.
• Tax-deductible expense: For a corporation to issue shares, considerable costs must be incurred. Additionally, it must pay its investors non-deductible dividends. On the other hand, the interest paid to debenture holders can be deducted by a company from its taxable income. Consequently, a corporation can save money by issuing debentures.

Q15. What are the primary factors influencing the selection of the funding source?

Answer. Each business enterprise has unique financial demands. Some people require short-term or long-term financing. Some people desire enormous sums of money, while others desire smaller amounts. Because there is less idle capital, short-term borrowing has the advantage of lower costs, while long-term borrowing is considered necessary for many reasons. Every source of funding has its restrictions. Therefore, it is best to employ various sources rather than just depending on one.

The decision for the business is challenging because of the following elements that influence the selection of this combination:

• Purpose and period: Businesses should plan how long they need the finances. For long-term financing, the issuance of shares and debentures is preferable. Short-term financing can be handled by borrowing money at a low-interest rate through commercial paper, trade credit, etc. To connect the source with the use, it is necessary to consider why funds are needed.
• Risk profile: Businesses should assess the risk associated with each funding source.
• Cost: When choosing the funding source, the expenses associated with obtaining and using the funds should be considered.
• Control: The control and influence of the owner on a company’s management may be impacted by a specific funding source. When choosing a source, a company should consider how much control they are ready to cede over the enterprise.
• Form of organisation and legal status: The choice of a fund-raising source is influenced by the structure of the organisation and its legal status. For instance, a sole proprietorship is not permitted to borrow money by selling shares to the public. Only joint-stock corporations can raise money in this manner.
• Financial strength and stability of operations: When choosing a funding source, a company’s financial health is crucial. The company must be financially stable to repay the loan and generate a consistent income stream.
• Flexibility and ease: When other solutions are easily accessible, a corporate organisation may choose not to borrow money from banks and other financial organisations due to restrictive clauses, extensive inquiry, and documentation, for instance.
• Tax benefits: The advantages of various funding sources may also be considered. For instance, although interest paid on debentures and loans is tax-deductible, dividends on preferred shares are not.
• Effects on creditworthiness: A company’s creditworthiness in the market may be impacted by its reliance on certain suppliers. For instance, the issuance of secured debentures may negatively impact the interests of unsecured creditors and their willingness to provide additional loans to the company.

Q16. Briefly describe the different forms of business finance and how they are used.

Answer. The following are the types of business finance and its uses:

The types of finance  utilised in a business vary depending on their nature and purpose-

• Long-term finance: Long-term sources meet an enterprise’s financial needs for over five years. Long-term fund-raising is referred to as long-term funding. These funds are invested in fixed assets including real estate, buildings, machinery, plants, furnishings, and fixtures. Assets that must be used permanently and are not intended for sale are fixed assets. For a company’s ongoing demands, long-term financing is employed. It is continually employed to produce income.

Such financing cannot be removed from the company without doing so in a way that reduces or eliminates its activities. Shareholders, debenture holders, financial institutions, and retained earnings are sources of long-term financing. The kind and scale of the firm determine how much long-term funding is needed. For instance, a factory needs more long-term capital than retail does.

• Medium-term finance: This funding is necessary to repay assets and investments in long-term working capital. Additionally, it is employed for growth and modernisation. It is elevated for an amount of time that is greater than one year but less than five years. Debenture holders, financial institutions, public deposits, and commercial banks are sources of medium-term financing.
• Short-term finance: Short-term finances are needed for a time frame that is less than a year. It is used to address the business’s immediate demands. It also goes by the name “working capital.” Working capital is the money needed to cover a company’s ongoing expenses, such as purchasing supplies and paying rent, taxes, freight, and other costs. Public deposits, commercial banks, trade credit, factoring, client advances, etc., are used to raise short-term capital.

The above-stated section of Important Questions Class 11 Business Studies Chapter 8 is a list of Important Questions which covers  the entire chapter.

Benefits of Solving Class 11 Sources of Business Finance Important Questions

Business studies is a significant subject for those studying commerce. They must read and understand this subject carefully if they want to enhance their knowledge of Business Studies. Class 11 students are often told to go through Important Questions Class 11 Business Studies Chapter 8. This list of important questions can make this subject easy to understand with complete conceptual clarity for the students so that they need not refer to any other reference material and waste their valuable time.  Here are some benefits of solving Important Questions Class 11 Business Studies Chapter 8 :

• These important questions are prepared by diligently following the CBSE exam pattern. Therefore, going through these will definitely help students prepare for exams too and avoid all that last minute hassle.
• Sources of Business Finance Important Questions covers the concepts of the entire chapter- Sources of Business Finance and they can enjoy detailed and authentic study material and can answer any question no matter how tweaked those questions are.
• Students can entirely rely upon these crucial questions as these are made following the guidelines laid by CBSE. These questions are prepared by subject matter ex perts who provide system atic and well-laid-out balanced study plans that boost their performance naturally and effortlessly.

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Q.1 Uday, a skilled potter, has a cottage industry located in a remote village near Tamil Nadu. Even after making pots which are better in quality and looks both, than the ones found in the international market, he is unable to earn money by selling them. Opt from the following, the limitation/problem he is facing.

A. Marketing problems

B. Lack of finance

C. Shortage of materials

D. Old production methods

Marks: 1 Ans

Marketing problems

Q.2 With an initial investment of 7 crore, Tarun started an auto component manufacturing unit at Rewari, Haryana. The investment comprised

• 3.5 crore on the premises
• 65 lakh on furniture and fittings
• 2.45 crore on machineries and equipments
• 40 lakhs on raw materials

After 2 years, he bought 4 more machineries of latest technology costing 3.45 crore. Identify the category of small scale business that Tarun Auto is into.

Marks: 5 Ans

According to MSMED Act, 2006, Taruns unit can be classified as a Manufacturing Enterprise as it manufactures auto components.

A manufacturing enterprise is one that is engaged in manufacturing or production of goods.

Taruns unit can be further categorised as a Medium Enterprise as the total investment made in terms of plant and machinery in the unit is more than 5 crore (2.45 + 3.45).

A medium enterprise is an enterprise where in investment on plant and machinery is more than 5 crore and up to 10 crore.

Q.3 Explain the Scheme of Fund for Regeneration of Traditional Industries (SFURTI).

The Central Government set up the fund named Scheme of Fund for Regeneration of Traditional Industries (SFURTI) with 100 crores to make the traditional industries in India more productive and competitive and to facilitate their sustainable development. At its initial stage in the year 2005 the scheme was to be implemented by the Ministry of Agro and Rural Industries in collaboration with State Governments.

However, on 9 th May, 2007, the Ministry of Agro and Rural Industries and Ministry of Small Scale Industries have been merged into a single Ministry, named, Ministry of Micro, Small and Medium Enterprises.

The ministry of MSME has introduced the programme all over India. The main object of scheme is to improve the economic conditions of traditional industries with the help of SFURTI programme.

Followings are the other main objects of the scheme: a) To help in the development of clusters of traditional industries. b) To build innovative and traditional sills, improve technologies and encourage public private partnerships. c) To promote employment opportunities in traditional industries.

Q.4 How do small scale industries contribute to socio economic development of India

Marks: 4 Ans

Indian society has various problems like unemployment, scarcity of capital, unbalanced regional development, economic inequality etc. Small scale industries help in solving these problems and help in the socio- economic development in following manner:

1. Small scale industries are labour intensive and provide employment to large number of people in rural areas where large industries cannot be set up.

2. Small scale industries prevent concentration of economic power and lead to wide dispersal of income as the small business units can be started with less capital and an individual can manage and run.

3. Small scale industries facilitate regional balanced development by setting up industries in rural areas. It prevents the migration of people from rural areas to urban areas.

4. Small scale industries use entrepreneurial abilities and unutilised savings of people in remote areas. It helps in raising the living standard in rural and backward areas.

5. Small scale industries provide valuable support to large scale industries by supplying them necessary inputs or distributing the final output. It shows the importance of this sector for the whole economy.

Marks: 3 Ans

NABARD (National Bank for Agriculture and Rural Development) is working for promoting integrated rural development by performing the following functions:

• It provides credit facility to the small industries, cottage and village industries, and artisans working in rural areas.
• It provides counseling and consultancy to the rural entrepreneurs.
• It organises training and development programmes for rural entrepreneurs.

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Cbse class 11 business studies important questions, chapter 1 - business, trade and commerce.

Chapter 2 - Forms of Business Organisation

Chapter 3 - private, public and global enterprises, chapter 4 - business services, chapter 5 - emerging modes of business, chapter 6 - social responsibilities of business and business ethics, chapter 7 - formation of a company, chapter 9 - small business, chapter 10 - internal trade, chapter 11 - international business, faqs (frequently asked questions), 1. where can i get the best important questions class 11 business studies chapter 8 along with their solutions.

In Extramarks Important Questions Class 11 Business Studies Chapter 8, all the questions relevant to this chapter have been answered. To summarise, every company endeavour requires some capital cost. Additionally, the business needs money for maintenance and day-to-day operations management. The phrase for this is business finance. There are many ways to finance a business. This chapter explains in  detail on all these topics and more.

2. What precisely is Class 11 business finance?

 A company cannot run until and unless sufficient funding is available for its effective administration and operation. The initial capital contribution made by the business owner is frequently insufficient to cover all the company’s financial needs. As a result, a businessperson must look  for additional funding sources. The idea of business financing is used in this situation. To know more about the same, refer to Important Questions Class 11 Business Studies Chapter 8 on the Extramarks website to enjoy maximum benefit of these resources.  .

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• CBSE Class 11 Business Studies Chapter 8 – Sources of Business Class 11 Notes

Sources of Business Finance Class 11 Revision Notes

In sources of business finance class 11 notes, we will study the meaning, nature, and significance of Business Finance. Then, we will study the financial needs of a business. Here, we will focus on Fixed and Working Capital requirements. Then, we will study the classification of the sources of funds on a different basis for different forms of organization. Furthermore, we will be studying the sources of finance, their merits, and their limitations.

Also, we will study International Financing and various international sources. Moreover, we will be studying the factors affecting the Choice of Source of Funds.

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Sub-topics under Sources of Business Finance:

• Classification of Sources of Funds : Here, we will study the classification of the sources of funds on a different basis for different forms of organization.
• Commercial Banks and Financial Institutions : In this Sub-topic, we will be discussing the meaning, merits, and limitations of Commercial Banks and Financial Institutions.
• Commercial Paper : Here, we will understand the term “Commercial Paper”. Also, we will come to know about its merits and limitations as a source of short-term finance.
• Debentures : Here, we will see the use of debentures as a source of finance for the fulfillment of capital requirements.
• Equity Shares and Preference Shares : In this, we will be discussing the merits and limitations of raising capital from Equity Shares and Preference Shares.
• Lease Finance and Public Deposits : In this, we will acquire knowledge about Lease Finance and Public Deposits.
• International Financing and Choice of Source of Funds :  We will study International Financing and also the factors affecting the Choice of Source of Funds .
• Meaning, Nature and Significance of Business Finance :  Here, we will study the meaning, nature, and significance of Business Finance.
• Retained Earnings, Trade Credit and Factoring : Here, we will cover the meaning, merits and limitations of Retained Earning, Trade Credit and Factoring as a source of finance.

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CBSE Class 11 Business Studies Revision Notes

• CBSE Class 11 Business Studies Chapter 4 – Business Services Class 11 Notes
• CBSE Class 11 Business Studies Chapter 3 – Private, Public and Global Enterprises Class 11 Notes
• CBSE Class 11 Business Studies Chapter 11 – International Business Class 11 Notes
• CBSE Class 11 Business Studies Chapter 10 – Internal Trade Class 11 Notes
• CBSE Class 11 Business Studies Chapter 9 – Small Business Class 11 Notes
• CBSE Class 11 Business Studies Chapter 7 – Formation of a Company Class 11 Notes
• CBSE Class 11 Business Studies Chapter 6 – Social Responsibilities of Business and Business Ethics Class 11 Notes

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Sources of Business Finance Class 11 Business Studies Notes And Questions

Please refer to Sources of Business Finance Class 11 Business Studies notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Business Studies books for Class 11 . You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 11 Business Studies Sources of Business Finance Notes and Questions

Sources of Business Finance Business finance refers to the money and credit invested or employed in the business firm. It is concerned with the acquisition and utilization of capital in meeting the financial needs and overall objectives of a business enterprise. Finance is very important to the business as it is the lifeblood of an organization. Without adequate amount of finance an enterprise cannot function smoothly.

Nature of Business Finance 1. It includes capital and borrowed funds. 2. It requires in all types of organization – big, small, production, trading etc. 3. Differs depending on the nature and size of business. 4. Requirement of fund vary from time to time – boom period and depression. 5. It requires on a continuous basis.

Significance of Business Finance 1. It requires to start a business. 2. To meet day-to-day expense. 3. To modernize, expand and diversify business. 4. To buy fixed assets.

Financial Needs of Business 1. Fixed capital requirements –  Purchase of land, buildings, plant, machinery etc. 2. Working capital requirements –  It may be used for holding current assets like stock, bills receivable and for meeting current expenses such as salary, rent, taxes etc.

Classification of sources of funds:

On the Basis of Period

1. Long Term Finance (Fixed capital) –  It refers to the funds raised for a long period, (minimum 5 Years) and it is used for investment in fixed assets which required for permanent needs of the business. Usually, long term finance is raised from shareholders, debenture holders, financial institutions, retained earnings etc.

2. Medium term finance –  It is used for the modernization and expansion of business,usually it is raised for a period of 1 to 5 years. It is also raised from the debenture holders, financial institutions, commercial banks, public deposits etc.

3. Short term finance –  It is raised for a period of less than a year and is used for meeting the short term needs of the business such as investment in working capital. E.g. purchase of materials, payment of wages and salaries, rent etc.

On the Basis of Ownership 1. Owners’ funds or Ownership capital –  It is the amount of capital contributed by the owner, partners or the share holders as the case may be. Issue of shares and retained earnings are the two important sources of company finance.

Features a. Risk capital – all the risk with regard to the enterprise lies on the shoulders of the owners and hence their capital bears all the risks. b. It is a permanent source of capital to the business. c. No security is required. d. It provides the right to manage and control the business.

2. Borrowed Funds It refers to the funds raised through loans or borrowings. It may be from the debenture holders, or from public deposits, financial institutions, commercial banks etc.

Features a. Raised for a fixed period. b. Fixed interest rate to be paid even if there is loss. c. Charge on assets. d. No sharing of control in management.

On the Basis of Sources of Generation 1. Internal sources – It refers to the funds that are generated within the organization. Eg: Equity shares, disposing of surplus stock , retained earnings etc. 2. External sources – It refers to those funds that are raised outside the business. Eg: Issue of debentures, banks loans, public deposits etc.

Choice of Source of Finance –  A business can raise funds from various sources by way of issue of shares, retained earnings, issue of debentures, loans from financial institutions and commercial banks, public deposits etc. Each of them are having its own merits and demerits, the entrepreneurs have to take decisions regarding their choice based on their situation and purpose.

Retained Earnings or Ploughing Back of Profits –  Usually a part of the profits is transferred to the reserves every year and it can be retained or reinvested in the business for its modernization, expansion etc. Reinvestment of undistributed profits is a very good source of business finance.

Merits 1. It is more dependable than external sources. 2. No dividend is to be paid. 3. No cost of raising funds such as prospectus, advertisement etc. 4. No sharing of ownership and control. 5. No security is needed. 6. It makes companies financially strong.

Limitations 1. It may result in overcapitalization. 2. It may create dissatisfaction among the share holders. 3. Not dependable in the year of inadequate profit. 4. Ignores opportunity cost.

Trade Credit –  It is the credit extended by one trader to another for the purchase of goods and services. When creditors grant such a facility, they are in fact financing purchases for a short period.

Merits 1. Convenient source of financing. 2. Readily available. 3. Increased sales. 4. Helps in maintaining higher inventory level. 5. No charge on the assets.

Limitations 1. Chances of overtrading – bulk trading than required. 2. Limited funds can only be generated. 3. Higher cost – by charging high price.

Factoring –  A factoring organization is a financial service provider which specializes in collection and administration of debts. A factor may be an individual or an institution.Debt collection and credit management is a tedious (difficult) process for the organization and it will take a long period of time. In such a case this duty may be entrusted to an agency called Factoring Organizations who are specialized in collection and administration of debts. They extend financial assistance (advance) against book debts and provide full protection against any bad debt. Factors do this service in return for a factoring commission and interest on advance granted.

Services rendered by Factors: 1. Discounting of bills and collection of the client’s debt –  Here the accounts receivable (bill receivable) are sold to the factors at a discount with or without recourse and they assumes all the risks on it. Eg: SBI Factors, Commercial Services Ltd.,Canbank Factors Ltd. and some financial institutions are also providing factoring services.

a. Recourse factoring – No protection is offered to the client on bad debt. b. Non-recourse factoring – Factor assumes the entire risk.

2. Providing information –  Factors provide information about the creditworthiness of the firms.

Merits 1. Cheaper fund than other means. 2. Instant cash flow enables the client to settle his liabilities in time. 3. It provides security for debt. 4. No charge on assets of the company. 5. The client can concentrate on core-areas.

Limitations 1. Expensive on invoices of small amounts. 2. Interest charged by factors on advance may be higher. 3. Customers may not feel comfortable while dealing with a third party factor.

Lease Financing –  Now a days it has been treated as an important source of long term financing. It is an arrangement under which a company acquires the right to use an asset without holding its title. The owner of the asset is called lessor and the user is lessee. The lessee has to pay the lease rent to the lessor for the use of the asset. At the end of the lease agreement the asset reverts to the lessor, who is the legal owner of the asset.

Merits 1. It enables the lessee to acquire the assets with a very little investment. 2. Limited formalities only. 3. Lease rent is a charge against profit, hence the tax liability is reduced. 4. It provides finance without sharing the ownership. 5. The risk of obsolescence on the shoulders of the owner of the asset.

Limitations 1. Restrictions on the use of asset. 2. Normal business operations may be affected on non-renewal of agreement. 3. If the lease agreement is terminated before maturity, it results in heavy loss. 4. Lessee may not take much care on the asset as he never becomes the owner.

Public Deposits –  It can also be treated as medium term finance, by which the companies may try to invite deposits from public at a higher rate of interest than the commercial banks. They are issued for a period up to 3 years. The acceptance of public deposits by companies is regulated by the RBI.

Merits 1. Less formality. 2. No security is given by the company. 3. No sharing of control. 4. No charge on assets.

Limitations 1. Not easy for a new company – Only the company with proven track record will get good response. 2. Unreliable source – Poor response from investors. 3. Limited funds – Raising large fund is not possible.

Commercial Paper (CP) – It is an unsecured promissory note issued to the public with a fixed maturity period ranging from 90 days to 1 year. Issuing commercial paper in India as a money market instrument took place in 1989-90. Since it is being unsecured, this is issued by highly reputed corporate entities. Commercial banks, Companies and mutual funds contribute towards this kind of instruments. It is also regulated by RBI.

Merits 1. No restrictive conditions – Since it is unsecured it has not restrictive conditions. 2. High liquidity – Freely transferable. 3. Economical – Cost of raising fund is cheaper than a bank loan. 4. Continuous source – Repayment of a CP can be made by issuing new CPs. 5. Investment of excess funds – Companies can keep their excess funds in CPs to earn more returns.

Limitations 1. Only sound firms can issue. 2. Limited funds can be raised. 3. Impersonal financing – Extension of maturity period is not possible in case of difficulties.

Issue of Shares The capital of a company is divided into a large number of equal parts or units. Each such unit is called a share. In other words share is the share in the share capital of a company. The aggregate value of shares is known as share capital. Those who subscribe to the share capital become the members of the company and are called share holders and they are getting the status of owners in the company. Hence shares are also described as ownership securities. Two types of shares are issued by companies to raise its capital such as Equity shares and Preference Shares. a. Equity Shares (Ordinary shares) – Equity shares are those shares which do not carry any special or preferential rights in payment of dividend or repayment of capital. Equity share holders are the risk bearers as well as the real owners as they are entitled to receive any money only after the payment of all other debts. The amount raised by the issue of equity shares is known as equity share capital.

Merits 1. Suitable for risk takers. 2. No obligation for dividend. 3. Permanent capital. 4. Provides creditworthiness to the company. 5. No charge against assets. 6. They have voting rights – Companies follow democratic management.

Limitations 1. Income is not steady – Fluctuation in dividend based on profit. 2. High cost – Cost of raising equity capital is very high. 3. Dilution in control for existing share holders when the company makes fresh issues. 4. Complex legal formalities – for the issue of shares.

b. Preference Shares – A preference share is one which carries certain preferential rights with regard to the payment of dividend at a fixed rate during the continuance of the company and repayment of capital on the winding up of the company. The capital raised by issue of preference shares is called preference share capital.

Privileges of a Preference Shareholder i. Right to get the dividend first at a fixed rate, before it is given to the equity shareholders. ii. Right to get the repayment of capital on winding up, before it is paid to the equity shareholders.

Merits 1. Fixed rate of return is guaranteed. 2. Preference in repayment of capital on winding up 3. No dilution in control – they have only restricted voting rights. 4. Trading on equity – Equity shareholders enjoys more return in good times. 5. No charge over the assets. 6. Economical – Cost of raising preference share capital is cheaper than equity capital.

Demerits 1. Not suitable for high risk takers – The return on investment is fixed. 2. Dilutes claim on assets – The claim on assets in the company should be shared with preference shareholders also. 3. High rate of dividend – Normally preference share capital bears high rate of dividend than the interest rate of debentures. 4. It may not attract many investors – The return on investment is not assured, but it is paid only if there is profit. 5. No tax benefits – Dividend on preference shares is not a charge against profit.

Types of Preference Shares 1. Cumulative Preference Shares – They have the right to enjoy unpaid dividend (in the year of loss or inadequate profit) in future years. 2. Non-cumulative Preference shares – Unpaid dividend is not carried forward to the subsequent years. 3. Participating Preference Shares – Usual dividend at fixed rate and share in surplus profit of the company. 4. Non-participating Preference Shares – No right to share surplus profit, fixed dividend only. 5. Convertible Preference Shares – These shares can be converted into equity shares after a particular period. 6. Non-convertible Preference Shares – No right to be converted into equity shares.

Note:  As per Indian Companies Act 2013, all preference shares issued by Indian Companies must be redeemed within 20 years.

Issue of Debentures In simple meaning debenture is a written document of debt. In other words, it is a written acknowledgement of debt by a company which contains the provisions regarding payment of interest and repayment of principal amount.

A company can issue debentures, if permitted by its Memorandum of Association and Articles of Association to invite the general public to contribute to its loan capital in the same manner as it invites the share capital. A person who holds the debenture is called Debenture holder and he has the status of a creditor of the company.

Merits 1. Fixed income at lesser risk – Suitable to conservative investors who are not willing to take much risk. 2. No participation in profit – Debentures are fixed interest bearing securities. 3. No dilution in control – Debenture holders have not voting rights. 4. Suitable during stable earnings – If the sales and profits are stable, it is better to raise funds through issue of debentures. 5. Less costly – Debenture financing is relatively cheaper than other sources.

Limitations 1. Permanent burden – Interest is to be paid even if there is no profit. 2. Repayment difficulty – Company has to accumulate enough funds for the repayment of debentures on redemption even if on financial difficulties. 3. Reduces borrowing capacity – As debenture itself is a debt for the company, they cannot raise additional funds by borrowings.

Types of Debentures 1. Secured or Mortgage Debentures – Issued with a charge on assets of the company. 2. Simple or Naked or Unsecured Debentures – Issued without any charge (security) on assets. 3. Registered Debentures – Names of debenture holders are entered in the ‘Register of Debenture holders’. 4. Bearer Debentures – Issued without the name of the owner. They are transferable by mere delivery. 5. Convertible Debentures (CD) – Issued with an option to convert them into equity shares after a particular period. 6. Non – Convertible Debentures (NCD) – It will not be converted into equity shares. 7. First Debentures – They are repayable before other debentures are repaid. 8. Second Debentures – Repayable after the first debentures have been paid back. Commercial Banks – Banks extend loans to firms in many ways like cash credit, overdraft,term loans etc. Rate of interest depends on factors like nature of business, interest rate prevailing in the country etc. Usually loans are allowed on the basis of securities and they are repayable either in lump sum or by installments.

Merits 1. Timely assistance – Banks provide timely help by providing funds as and when needed. 2. Secrecy – Information furnished to the bank by the borrower is kept confidential. 3. Less formalities – Formalities like issue of prospectus etc. not required. 4. Flexible – The loan amount can be increased or decreased or even repaid whenever required.

Limitations 1. Meeting short term needs only – Most of the bank loans are short period in nature. It’s extension or renewal is uncertain. 2. Detailed investigation – Banks may conduct detailed investigation about company’s affairs, financial structure and also ask for securities. All these make the procedure difficult. 3. Too many restrictions – Banks may impose difficult terms for granting loans, which may affect the smooth functioning of the business. Eg: Restriction on the sale of mortgaged asset.

Loans from Financial Institutions – A number of financial institutions have been set up by government with the main object of promoting long tern industrial finance. As they aim at promoting industrial development, they are also called “development banks”. They are not only providing financial assistance, but conducting market surveys, providing technical and managerial services etc.

Special Financial Institutions / Development Banks a. Industrial Development Bank of India (IDBI). b. Industrial Finance Corporation of India (IFCI). c. Industrial Credit and Investment Corporation of India (ICICI). d. Industrial Reconstruction Bank of India (IRBI) e. Unit Trust of India (UTI). f. Life Insurance Corporation of India (LIC). g. State Financial Corporation (SFCs) h. State Industrial Development Corporation (SIDC)

Merits 1. Long term finance – They provide long term finance, which is not provided by commercial banks. 2. Additional services – They are also conducting market surveys, providing managerial and technical services etc. 3. Increases goodwill of the company – Obtaining funds from these financial institutions often increased the reputation of the firm. 4. Easy repayments – It reduces burden for the business. 5. Reliable source – Funds are available even during depression, when other sources are not available.

Limitations 1. Complicated formalities – Rigid formalities in obtaining loans makes the procedure time consuming and expensive. 2. Imposing restrictions – Restrictions on dividend payments may be imposed. 3. Interference in management – Financial institutions may have their nominees in director board of the company.

International Financing Indian companies have an access to funds in global capital market. Various international sources from where funds may be generated include:

1. Commercial Banks:  CBs all over the world extend foreign currency loans for business purposes. Eg: Standard Chartered Bank, City Bank etc.

2. International Agencies and Development Banks:  A number of international agencies and development banks have emerged over the years to finance international trade and business. Eg. IFC (International Finance Corporation), EXIM Bank and ADB (Asian Development Bank) etc.

3. International Capital Markets:  The major instruments used in international capital markets are:

a. GDRs (Global Depository Receipts):  It is an instrument issued abroad by an Indian company through an Overseas Depository Bank (ODB) to raise funds from foreign countries and is listed and traded on a foreign stock exchange. It does not carry any voting right but only dividends and capital appreciation. It is usually seen in European Union. How GDR works – An Indian (domestic) company enters into an agreement with ODB to issue GDR – ODB then enters into a custodian agreement with a domestic custodian to hold the shares of that company – On the instruction of the domestic custodian, the ODB issues shares to foreign investors.

b. ADRs (American Depository Receipts):  ADRs are bought and sold in American markets like other stocks. It is similar to GDR except that it can be traded only on a stock exchange of USA.

c. IDRs (Indian Depository Receipts):  It is a financial instrument denominated in Indian Rupees in the form of Depository Receipt. It is created by an Indian Depository to enable a foreign company to raise funds from Indian securities market. ‘Standard Chartered PLC’ was the first foreign company that issued IDR in Indian securities market in June 2010.

d. FCCBs (Foreign Currency Convertible Bonds):  These are the securities that are to be converted into equity after a specified period of time. They are issued in a foreign currency and carry a fixed interest rate. These are listed and traded in foreign stock exchanges. It is very similar to convertible debentures issued in India.

Factors affecting the choice of the Source of Funds a) Cost (cost of procurement and cost of utilizing the fund). b) Financial strength and stability of operation of the business – if the firm is in a sound financial position it can resort to more borrowed funds. c) Form of business and legal status – only a joint stock company can issue shares and debentures, but a partnership firm cannot do so. d) Purpose of the fund and time period – Commercial paper, trade credit etc. is suitable for short term fund while shares, debentures etc. are better for long term. e) Risk profile of each source – risk is least in case of equity shares compared to loans. f) Control – Extent to which they are willing to share their control over the business. g) Effect on creditworthiness – For example, issuing secured debentures may affect the interest of unsecured creditors. h) Flexibility and ease of obtaining funds – bank loans are bound to detailed investigations and documentation, which will take very much time to obtain funds. i) Tax benefits – interest on debentures is a deductible expense where as dividend is not so.

We hope the above Sources of Business Finance Class 11 Business Studies are useful for you. If you have any questions then post them in the comments section below. Our teachers will provide you an answer. Also refer to MCQ Questions for Class 11 Business Studies

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Sources of Business Finance Class 11 Notes PDF (Handwritten & Short Notes)

Students who have opted commerce stream, need to understand better and score well in questions regarding the chapter Sources of Business Finance. Class 11 students can smoothly perform better with the help of Sources of Business Finance Class 11 notes. Accordingly students can also understand other chapters of Class 11 Business Studies in a better way. 

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Sources of Business Finance Notes Class 11 PDF

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• Open the Selfstudys website on any of the electronic devices. 
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• Drop-up menu will appear, select NCERT notes from the list.

• A new page will appear, select Class 11th from the list of classes.

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• Again a new page will appear, now select Sources of Business Finance from the list of chapters. 

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The Class 11 Sources of Business Finance notes are short and compressed content which includes all topics and concepts brief in an organised manner, better presentation and easier explanations. These notes help students to improve their grip for the chapter Sources of Business Finance. Strong foundation for the chapter Sources of Business Finance can help students to improve their score and because of these reasons the revision notes of Class 11 Sources of Business Finance is popular among students.

Is Sources of Business Finance Class 11 Notes Relevant to Exam Preparation?

Yes, the Sources of Business Finance Class 11 notes are very much relevant during the preparation. The Class 11 Accountancy content is very accurate and contains relevant topics for students to study. Accordingly, students don’t need to search for various important topics here and there. Accordingly, students can easily study relevant content of the Class 11 Business Studies chapter Sources of Business Finance if they refer to the NCERT Class 11 Business Studies Notes. 

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NCERT Solutions for Class 11th: Ch 8 Sources of Business Finance

Ncert solutions for class 11th: ch 8 sources of business finance business studies, contact form.