Sources of Business Finance
The requirement of funds by business to carry out its various activities is called ‘Business Finance’. Requirement of business finance can be classified into two categories: Fixed Capital and Working Capital. Fixed capital refers to the funds required for acquisition of fixed assets like plant and machinery, furniture etc. and working capital refers to the funds required for meeting cost of current assets namely debtors, cash sale business etc. Business finance can be classified into Owner’s fund and borrowed funds. Owner’s funds are provided by Owner ,not refundable during life period of Business and gives ‘Right of Control’ to owner. Owner’s funds comprises of share capital in the form of equity shares, preference shares and retained earnings, international finance in the form of GDRs, ADRs and IDRs. Equity Shares are those shares that represent ownership of a company. Preference shares are those shares that enjoy a preferential position over equity shares with respect to ‘claim of dividend’ and repayment of capital. Preference shares can be convertible and non convertible shares. Retained earnings are portion of the net earnings which may be retained in the business for use in future. Indian Capital market comprise of Global Depository Receipts (GDRs) and American Depository Receipts( ADRs). GDRs are negotiable instruments issued abroad by an Indian company to raise funds in some Foreign Currency. ADRs are negotiable instruments issued by a non-US company, to US Investors representing shares owned by those investors in the companies in US Dollars. Indian Depository Receipts (IDRs) are instrument denominated in Indian Rupees, created by an Indian Depository, against the underlying equity shares of the issuing foreign company.
Borrowed funds refer to the funds raised through loans or borrowings. Borrowed funds have to be repaid after a specified period . A fixed rate of interest is paid on the borrowed funds. Borrowed funds comprises of debentures and bonds, loans from Commercial Banks, Public Deposits, Trade credit and Inter Corporate Deposits.