Firms of all sizes can approach commercial banks. At times additional funds are required for upgrading the technology employed so that the cost of production or operations can be reduced. 3. The factors that affect the choice of source of finance are discussed below: (ii) Financial strength and stability of operations: (iii) Form of organization and legal status: Various sources may also be weighed in terms of their tax benefits. So, go ahead and check the Important Notes for CBSE Class 11 Business Studies Sources of Business Finance from this article. This case study will also help those who are prospective in business. Before appearing in the main examination, candidates must try mock test as it helps the students learn from their mistakes. Different business units need varying amount of fixed capital depending on various factors such as the nature of business, etc. They are an important source of financing non-trade international operations. (i) Equity shares with equal rights. The local currency shares of a company are delivered to the depository bank. The loan is repaid either in lump sum or in installments. Too many formalities make the procedure time consuming and expensive; (ii) Certain restrictions such as restriction on dividend payment are imposed on the powers of the borrowing company by the financial institutions; (iii) Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company. Thus, a holder of FCCB has the option of either converting them into equity shares at a predetermined price or exchange rate, or retaining the bonds. (i) Discounting of Bills of Exchange When goods are sold on credit then a supplier generally draws bills of exchange upon customers who are required to accept the same. Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. All Chapter wise Questions with Solutions to help you to revise complete Syllabus and Score More marks in your examinations. 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. External sources of funds include those sources that lie outside an organization, such as suppliers, lenders, and investors. (I) the procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement; (ii) Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions; (iii) Public deposits do not usually create any charge on the assets of the company. Sources of Business Finance Notes Class 11: Extramarks offers notes & NCERT solutions of Sources of Business Finance for CBSE Class 11. Question 10: Internal sources of capital are those that are. GDR is a negotiable instrument and can be traded freely like any other security. Similarly, the purposes for which funds are required need to be considered so that the source is matched with the use. Trade Credit It refers to an arrangement whereby a manufacturer is granted credit from the supplier of raw materials, inputs spare parts etc. Such sources provide funds for a specified period, on certain terms and conditions and have to be repaid after the expiry of that period. 1. Business Finance It refers to capital funds and credit funds invested in the business. It is a source of internal financing or self-financing or ‘ploughing back of profits’. Companies generally invite public deposits for a period up to three years. 12. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the business. The volume and period of credit extended depends on factors such as reputation of the purchasing firm, financial position of the seller, volume of purchases, past record of payment and degree of competition in the market. This makes the procedure of obtaining funds slightly difficult; (iii) In some cases, difficult terms and conditions are imposed by banks. The deposits are beneficial to both the depositor as well as to the organisation. Identify in the following cases factor affecting the choice of capital: Raj an has an option of taking … (iii) Source of Generation Basis Another basis of categorising the sources of funds can be whether the funds are generated from with in the organisation internal or from external sources. The difference between the face value of the debenture and its purchase price is the return to the investor. Practice sample question papers … This is because their maturity can be tailored to suit the requirements of the issuing firm. The government has established a number of financial institutions all over the country to provide finance to business organizations. Similarly, some funds are required for day-to-day operations, say to purchase raw materials, pay salaries to employees, etc. This PDF file for class 11 Sources of Business Finance subject's Business Studies topic contains brief and concise notes for easy understanding of topics and quick learning. (c) Short Term Finance The finance required for a short period upto one year is known as short term finance. Since these are unsecured that is why these are generally issued by companies having a good reputation. A lease is a contractual agreement whereby one party i.e., the owner of an asset grants the other party the right to use the asset in return for a periodic payment. Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’. CBSE Class 11 Business Studies Notes Maths Notes Accountancy Notes Sociology Notes. It includes all funds available by way of loans or credit. Trade credit facilitates the purchase of supplies without immediate payment. On the basis of period, the different sources of funds can be categorized into three parts. ... Trade credit may be readily available in case the credit worthiness of the customers is known to the seller; Candidates who are studying in Class 11 can also check Class 11 NCERT Solutions from here. Preference shares resemble debentures as they bear fixed rate of return. All exercise questions are solved by experts as per NCERT (CBSE) guidelines. Case study questions involving various topics and chapters in Business Studies are becoming a reason to create panic in students but there is nothing like this. For the sake of the candidates we are providing Class 11 Mock Test / Practice links below. generated through outsiders such as suppliers; (iv) The lessee never becomes the owner of the asset. Similarly, larger funds may be required for building higher inventories for the festive season or to meet current debts or expand the business or to shift to a new location. A company can issue different types of debentures (see Box C and D). In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange. About Us | Debentures are instruments for raising long term debt capital. 1. Here we have provided Exemplar Problems Solutions along with NCERT Exemplar Problems Class 11. 1 online platform for all types of online study material. (i) Retained Earning Retained undistributed profits after payment earning refers to of dividend and taxes. A company cans raise owner’s funds in the following ways:- 1. NCERT Solutions Class 11 Business Studies Chapter 8 Sources of business finance. They are referred to as ‘residual owners’ since they receive what is left after all other claims on the company’s income and assets have been settled. It provides security for a debt that a firm might otherwise be unable to obtain; (iv) It does not create any charge on the assets of the firm; (v) The client can concentrate on other functional areas of business as the responsibility of credit control is shouldered by the factor. The importance of finance increased tremendously these days because of mass production and use of capital intensive techniques. (ii) Banking and Finance: Business needs funds for acquiring assets, purchasing raw materials and meeting other expenses. 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. The capital raised by issue of preference shares is called preference share capital. External funds may be costly as compared to those raised through internal sources. There are two methods of factoring — recourse and non-recourse. Both these costs should be taken into account while deciding about the source of funds that will be used by an organization. Answer: Trade Credit Trade credit is the credit extended by one trader to another for the purchase of goods and services. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The amount of working capital required varies from one business concern to another depending on various factors. Get Sources of Business Finance, Business Studies Chapter Notes, Questions & Answers, Video Lessons, Practice Test and more for CBSE Class 10 at TopperLearning. 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. Debentures are called creditorship securities because debenture holder are called creditors of a company. Such type of financing is more prevalent in the acquisition of such assets as computers and electronic equipment which become obsolete quicker because of the fast changing technological developments. A loan on the other hand, has a repayment schedule for both the principal and the interest. Thus, preference shares have some characteristics of both equity shares and debentures. Trade credit is commonly used by business organizations as a source of short-term financing. The financial requirements of an enterprise do not end with the procurement of fixed assets. (I) Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends; (ii) It is an uncertain source of funds as the profits of business are fluctuating; (iii) The opportunity cost associated with these funds is not recognized by many firms. 14. Prominent financial instruments used for this purpose are: (b) American Depository Receipts (ADR’s): (c) Foreign Currency Convertible Bonds (FCCB’s): Factors Affecting the Choice of the Source of Funds. After 1991. the Indian companies tap international sources of finance for both debt and equity. Class 11 NCERT Business Studies Books are created by the best professors who are experts in Business Studies and have good knowledge in the subject. 9, Issue of Shares Share is the smallest unit in which owner’s capital of the company is divided. A share may also be defined as a unit of measure of a shareholder’s interest in the company. They enjoy the reward as well as bear the risk of ownership. Another aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. At times it puts a lot of burden on the business as payment of interest is to be made even when the earnings are low or when loss is incurred. The questions includes 1 mark questions, 2 mark questions, 3 mark questions, 4 mark questions, 5 mark questions and other questions as per the latest CBSE curriculum for the current session. whereby the lessor permits the lessee to use the asset acquired by the lessor in return of a payment called rent. 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. 11. FCCB’s are very similar to the convertible debentures issued in India. ... Sources of Business Finance . Debentures Debentures are common securities issued under borrowed fund capital. Their liability, however, is limited to the extent of capital contributed by them in the company. There are two types of cost viz., the cost of procurement of funds and cost of utilizing the funds. There must be financial institutions to provide financial assistance and guidance to industries and business enterprises. Get step by step NCERT solutions for Class 11 Business-studies Chapter 8 - Sources of Business Finance. In Companies Act permitting companies to issue two categories of equity shares. This is known as fixed capital requirements of the enterprise. Its regulation comes under the purview of the Reserve Bank of India. Any member of the public can fill up the prescribed form and deposit money with the company. The financial needs of a business can be classified into two categories. The owner of the assets is called the ‘lessor’ while the party that uses the assets is known as the ‘lessee’. 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