Chapter 8: Sources of Business Finance

The fund required to carry the load of the organisation and its daily operations is called business finance. Businesses need funds due to the following reasons:

1. An organisation needs machinery, buildings, furniture, etc., to set up operations, and to purchase all these items, funds are needed. This is called fixed capital requirement. The amount varies with the type of business.

2. To run day-to-day operations like purchasing raw materials requires regular funds, also called working capital requirement.

The long-term finance sources are listed below:

1. Equity Shares

2. Debentures

3. Retained earnings

4. Preference shares

5. Loans from banks and other financial institutions

The short-term finance sources are listed below:

1. Commercial papers

2. Trade credit

3. Short-term loans from banks

The following rights are enjoyed by preference shareholders:

1. At the time of dividend declaration, be the first to receive a fixed rate of dividend from profits.

2. In case of liquidation, the preference is to receive capital after creditor claims are settled.

3. In case of company dissolution, the preference share capital will be refunded before equity share capital.

1. Unit Trust of India (UTI): Established in 1964 as per the Unit Trust of India Act, 1963. The objective of setting up UTI was to mobilise savings and make the funds that are available towards investment in profitable ventures.

2. Life Insurance Corporation of India (LIC): It was set up in 1956 under the LIC Act, 1956, making all existing insurance companies nationalised. The objective is to encourage savings as a premium towards insurance and invest it in the form of loans to industrial units.

3. Industrial Finance Corporation of India (IFCI): It was established in the year 1948 under the Industrial Finance Corporation Act 1948. Its objective was to provide assistance in balanced regional development and encourage entrepreneurs to explore rising sectors of the economy and also contribute towards management education development.

Global Depository Receipts (GDR): GDR is the receipts that are shared by depository banks against company shares. GDR are denoted in US dollars and can be easily converted into shares at any time. They can be listed and traded on all stock exchanges over the world.

American Depository Receipts (ADR): These receipts are issued by companies which are US based and, like other securities, get traded in the market. The only factor is that the trading is restricted to the US Securities market, and these receipts are only sold to US citizens.