Business finance refers to capital funds and credit funds invested in the business.
• Nature And Significance Of Business Finance
No one can start a business or run an enterprise without adequate funds. Every business requires some money to start, which is called initial capital. The amount of capital required depends upon the nature and size of the business.
Business enterprises required capital and finance for the following purpose :-
1. While starting a business, finance is required to procure fixed assets and also for meeting day-to-day expenses.
2. To meet the working capital requirement when production process is lengthy.
3. To financial the growth and expansion projects of the company.
Adequate finance provides the following benefits to a business concern :-
1. The firm can meet its liabilities on time.
2. The firm can carry on its business smoothly.
3. The firm can make use of its business opportunities.
• Source of finance on the base of ownership
For every business enterprises, there are two sources of business finance. These are :
• Owner's fund • Borrowed fund
• Owner's Fund
Owner's fund refers to the funds contributed by the owner as well as accumulated profit of the company. This fund remains with the company, and it has no liability to return this fund. For example, equity shares, retained earnings.
• Borrowed fund
Borrowed fund refers to the borrowing of the firm. It includes all fund available by the way of loan or credit.
• Owner's fund are :-
• Equity share :-
The equity shares are those shares which do not carry any special or preferential rights in the payment of annual dividend or repayment of capital.
• Preference share :-
Preference shares, are those shares which get preference over equity share in respect of the payment of dividend and the repayment of investment amount during winding up.
• Retaining:-
It refers to undistributed profits after payment of dividend or all taxes.
• GDR :-
Global Depository Receipt.
• ADR :-
American Depository Receipt.
• IDR :-
Indian Depository Receipt.
• Borrowed fund are :-
• Debenture :-
Debenture is the most common security of borrowed fund. These are also called creditor ship between securities.
• Loan from financial institutions :-
Institutional finance refers to finance raised from financial institutions other than commercial banks.
• Loan from commercial bank:-
Commercial bank occupy a very important position as they provide funds for different purposes and different periods. Firms of all sizes can approach commercial banks. Generally, commercial banks provide short-term and medium-term loan, but nowadays, they have started giving long-term loans against security.
• Public deposit :-
Public deposits refer to unsecured deposits invited from the public.
• Trade credit :-
The ability of trade credit depends on open nature of the firm, size of the firm and status of the firm.
• Factor Kept In Mind Before Selecting A Suitable Source Of Business Finance
No source of business finance is free from limitations, so we cannot say which is the best source of finance. Before deciding the source of finance to meet the financial requirements, the businessman must keep in mind the following factors :
1. Cost Involved
2. Financial Capacity of the Firm
3. Forms of Business Organization
4. Time period
5. Risks Involved
6. Control
7. Flexibility
8. Claim over the Asset
9. Tax Benefit
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