MEANING OF BUSINESS FINANCE

3. Meaning of Business
Finance
Business finance refers to capital and credit funds
invested in the business .financing means making
available when its needed.
Business finance
may be defined as planning,raising,managing and
controlling all the money used or capital funds of any
kind used in connection with business

4. Definitions by different authors
“Finance is that business activity
which is concerned with the
acquisition and conservation of
capital funds in meeting the
financial needs and overall
objectives of business enterprise”.
-B.O Wheeler.

5. “Business finance involves a set of administrative
functions in an organization which relate with the
arrangement of cash and credit so that the
organization may have the means to carry out its
objectives as satisfactory as possible”.
- Howard and Upton

6. Nature and significance
No one can start the business or run an
enterprise without adequate funds. Every
business requires some money which is
called initial capital . The amount of capital
required depends upon the nature and
size of business.

7. Business enterprise requires capital and
finance for the following purposes
While starting a business ,finance is required to procure fixed
assets and also for meeting day – to – day expenses .
To meet the working capital requirement when production
process is lengthy.
To finance the growth and expansion projects of the company .

8. Adequate finance provide the following
benefits to a business concern
The firm can meet its liability on time .
The firm can carry on its business smoothly.
The firm can adopt latest technology and new
innovative methods of production.

9. The firm can make use business opportunities.
The firm can replace its assets and machinery
whenever necessary.
The firm can face recession and depression period
of trade cycle.
The firm can face completion more
strongly.

10. A business enterprise needs finance at every
stage . It must be available in an adequate
amount at the right time for smooth
functioning of an enterprise .Is short we can
say that finance is the blood of the business

11. The financial needs of a business can be
classified into two categories
Fixed capital requirement.
Working capital requirement

12. Fixed capital requirement
In order to start a business finance
is required to buy fixed assets such
as land ,buliding,plant etc.this is
known as fixed capital .the fixed
capital remains invested in the
company for the long term ,that is
, the company should prefer long
term sources of finance to meet
the requirement.

13. Working capital requirement
The finance required to carry on operating
and day to day activities is known as
working capital . Generally working
capital is used to buy current assets
which get converted into cash in one
year. Generally firm prefers short
sources of finance to meet working
capital requirement .

14. CLASSIFICATION OF SOURCES
OF FUNDS
The various sources of funds can be broadly
classified on the basis of following 3
categories

15. Period basis
Ownership basis
Sources of generation
basis

16. PERIOD BASIS
On the basis of time period, a business
finance can be classified in three
categories:-
Long Term Finance
Medium Term Finance
Short Term Finance

17. Long Term Finance
Funds which are required to be invested
in a business for a long period of time,
that is, more than 5 years are known
as long term finance.

18. FEATURES
This type of fund is used for acquiring fixed assets. For
example, land, plant etc .
Small factory, retailers, traders etc. require smaller long term
finance.

19. MEDIUM TERM FINANCE
The finance required by business enterprises
for more than one year but less than five
years is known as medium term finance.

20. FEATURES
Generally manufacturing industries require
medium term finance.
Common sources of raising medium term finance
are: accepting public deposits, medium term
loans etc.

21. SHORT TERM FINANCE
The finance requiredfor a short period up to 1 year is known as
short termfinance.

22. FEATURES
It is more often called working capital.
Generallytrading companies require more
of short termfinance
as compared to
manufacturing
companies.

23. For every business enterprise , there
are two sources of business finance.
These are
Owner’s Fund
Borrowed Fund

24. OWNER’S FUND
Owners Fund refers to the funds contributed by
owners as well as the 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.

25. FEATURES
No security required-
No security has to be offered against
ownership capital.
Sources of owner’s fund-
The owner’s fund comprises of share capital,
retained earnings.

26. Merits
Permanent capital –
The owner’s fund remains with the business
permanently. It is the most suitable fund to meet
problems.
Right to control –
The final decision in the business is taken by the owners.
By contributing to owner’s fund, share holders acquire the right to
control and supervise over the management of the company

27. DEMERITS
Under Utilization of capital-
Ownership funds cannot be reduced easily
as these are a permanent source of capital. If
company has no expansion of growth projects
then a part of this fund may remain idle.
Diffusion of control-
By purchasing the equity shares of the
company a large number of persons can get
ownership rights of control over management.
This may reduce the control and powers of the
real owners who have promoted the company.

28. BORROWED FUND
Borrowed fund refers to the borrowing of
the firm. It includes all funds available
by way of loans or credit.

29. FEATURES
Fixed time –
The borrowed fund is raised by business firms for
specified periods. These funds may be raised for short
term, medium term or long term.
Security-
Generally firms can get borrowed funds
against the securities of assets. Banks are
financial institutions offer loans on different
terms against the security of assets.

30. MERITS
Flexibility-
The amount of borrowed fundcan be increasedby raising more and
can be decreasedby paying themback. So finance can be raisedor
repaid according to convenience and needs of the company.
No interference –
Borrowedfunds security holder do not get any right to control. It
does not affect owner’s control over management.

31. DEMERITS
Adequate security-
The borrowed funds are usually available up to 80% of
the value of assets. Companies are required to offer
adequate securities against loans.
Fixed liability-
Payment of interest and repayment of principal amount of
borrowed fund is a fixed liability of a company. Default in
payment may lead to serious effects such as decrease in
the credit-worthiness of the company and insolvency.

32. Sources of generation basis
On the basis of generation. It
can be classified into two
categories
Internal sources
External sources

33. Internal sources
It include all those sources
which are generated
within the business

34. External sources
It include all those sources that lie
outside
an organization

35. Methods of raising finance
Retained earning
Trade credit
Factoring
Lease financing
Public deposits
Commercial papers
Equity shares
Preference shares
Debentures
Commercial banks
Financial institutions
International financing

36. Retained earning
These are also known as ploughing back of profit
,retained earnings, self financing or internal
financing ,reserves or surplus.
It refers to undistributed profits after
payment of dividend and taxes provides the basis
of expansion and growth of companies. It
is considered the most important source of
finance since its internally generated this
method of financing is known as self–financing.

37. Features
Funds for new innovative projects –
The retained earnings are common source of funds for financing risky
and innovative projects . This fund is generally used for research work
expansion projects etc.
Medium and long term finance –
Retained earning is considered as an ownership fund . It serves the
purpose of medium and long term finance.
Conversion into ownership fund-
The supplies retained earnings can be converted into share
capital by issue of bonus shares . In issue on bonus shares there
is no outflow of cash . Investors to are benefited by the issue of
shares fr of cost.

38. Merits
Most dependable source-
As an internal source this is more dependable than the external
source of finance . The external source depends upon the preference
of investors market condition etc.
No fixed liability –
There is no fixed commitment to pay dividend or interest on
this source of fund as retained profits are a company's own money.
No security –
Unlike debentures no change is created against the assets .
The company is free to use its assets for raising loans in future.

39. Demerits
Careless use-
The retained earnings are available easily at no cost.
The management of the company not always use the
retained earnings in the best interest of the shareholders. it
may misuse them by investing in unprofitable or undesirable
investment proposals.
Over- capitalization –
large amount of retained earning results in the issue of
bonus shares to equity shareholders .frequent
capitalization of reserves may result in over-capitalization.
Dissatisfaction among shareholders –
Large retained earnings may cause dissatisfaction among
the equity shareholders as they do not receive high rate
of dividend if a large amount of surplus profit is kept aside
in the form of reserves.

40. Trade credit
Trade credit is a credit extended by one trader to
another
for purchase of goods and services trade
credit facilitate the purchase of supplies
without immediate payment it is also known as mercantile
credit
terms of trade credit may vary from one industry to
another and from one person to
another
. firm may offer different credit terms to different
credit customers.

41. The availability of trade credit
depends on:
Nature of the firm.
Size of the firm.
Status of credit worthiness
of the firm

42. MERITS
READILY AVAILABLE
Trade credit is available without any special efforts
on the part of a manufacturer or trader
FLEXIBLITY
There are no rigid rules and regulations
involved in trade credit .it can be easily adjusted
with the changing needs of purchases as time of
payment is generally adjusted in view of past
dealings.

43. Demerits
Increases in prices-
Sometimes the supplier may increase the price of
commodity or raw material supplied if he is selling
Legal action-
In trade credit the buyer generally issues a
promissory note and incase he fails to meet his
commitment, the supplier can take legal action.
goods on credit

44. FACTORING
It is a financial service under which the
factor renders the following services.

45. Following services are
Discounting of bills and collection ofclient debts
Discounts bills of exchange and also collects the
debts of clients the client sell their receivable on
accounts of credit sale or the factor of certain
discount the factor become responsible for all
credit control and debt collection from a buyer and
provide protection against any bed debt losses to
the firm

46. Providing information about credit worthiness of
prospective client
Factors hold detailed information about the trading
history of the firm. with the help of the such information
firms using factoring services are saved from doing
business with customers with poor payment record
besides this factors also provide consultancy services in
area of finance marketing etc. the factor charges fees for
the services rendered and these services are provided by
the organization SBI factors, commercial services limited etc.

47. MERITS
Obtaining funds from factoring is cheaper
than any other sources of finance.
No claims over the asset of the company.
It provides a kind of security for a debt which
the company otherwise might not be able to pay.

48. DEMERITS
Factors generally charge a high rate of interest.
By involving a factor the company is inviting a
third party between customer and company the
customer may not like it.

49. LEASE FINANCING
A lease is a contractual agreement in which the
owner of the asset grants the other party the right to
use the asset in written of a periodic payment retains
title over the property

50. MERITS
With low financial investment the lessee can use
assets which require huge investment.
Not much of legal formalities is required.

51. Lease rent is deducted from the income of
lessee before calculating the income tax.
Lessee has no risk of obsolescence.
Lessee has no claim over the assets of the
company.

52. Demerits
Lesser may put certain restrictions on use of the assists.
Lessee never become owner of the asset.
The business operations may get affected if lessor
terminates the agreement before maturity date or does
not renew the lease contract.

53. PUBLIC DEPOSITS
These are the deposits raised by an organization
directly from the public .under this method
company is inviting public deposit. public deposit
are required to advertise publically along with it
financial position .public deposit can take care of
medium and short term financial requirements of
the business such deposits are beneficial to both
depositor as well as organization.

54. Features
Unsecured –
Companies mortgage no asses against the
public deposits raised from general public.
Finance of working capital –
The amount raised from public
deposits is generally used by the company for meeting
the requirements of working capital. though they are
a primary source of short term finance but by
renewing these can be used for medium term also.

55. Time period –
Public deposit can be invited by companies
for a period of 6 months to 3 years.
Repayment –
A company which has public deposits is
required to set aside 10 percent of the deposits
maturing by the end of the year . The amount so set
aside can be used for repaying the public deposits.

56. MERITS
NO SECURITY
Public deposits are unsecured so the assets of the company
are free to be used as mortgage in future.
REDUCTION IN TAX LIABILITY.
Interest paid on public deposits is deducted from the
total income of the company. hence it helps in bringing
down the tax liability.

57. .
Flexibility
Public deposits can be repaid when they are not required .
their for public deposits introduce flexibility in the financial
structure of the company
NO DILUTION OF CONTROL
Public depositors have no voting rights they
cannot influence the decisions of the company their is
no dilution of share holders control.

58. DEMERITS
LIMITED AMOUNT
The amounts of funds that can be raised by way of public
deposits is limited because of legal restrictions. public
deposits cannot exceed 25% of share capital and free
reserves.
UNCERTAINITY
Public deposits are an uncertain and unreliable source of
finance. during depression period the depositors may not
respond .also deposits may be withdrawn when ever the
financial position of the company is not stable.

59. Not suitable for new concerns
New companies don't have enough goodwill in the market.
The advertisements given by new companies do not attracts
many people to invest money in their public deposits.
Suitable for conservative investors
Public deposits do not attract bold and adventurous
investors who want capital gains .only cautious and
conservatives investors prefers to invest in 6the
public deposits.

60. Commercial papers
Commercial papers is source of short term finance. The
commercial paper was introduced in India for the first time
in 1990 . It is an unsecured promissory note issued by public
and private sectors companies with a fixed maturity period
,which varies from 3-12 months . Since these are unsecured
that’s why these are generally issued by companies having a
good reputation .

61. Merits
Commercial papers are unsecured so no asset of the
company is mortgaged.
Commercial papers are freely negotiable
instrument.
Cost of issuing commercial paper is low.

62. Its continuous source of funds as its maturity can be
changed according to the requirement of the
company .
Companies can also invest their excess money in
discounting the commercial and earn a good amount
of return.

63. Demerits
Only financially sound companies with a
good reputation can issue this security .
The size of money that can be raised through
commercial papers is limited.
Commercial papers is an impersonal method
of financing.

64. SHARES
Share is the smallest unit in which owners
capital of the company is divided .A share
is the interest of the shareholder in the
company measured by a sum of money for
the purpose of liability and interest. A share
may also be defined as a unit of measure
of share holder's in the company.

65. TYPES OF THE SHARES
Equity shares
Preference shares

66. Equity shares
They are the most important source of raising
long term capital by company .Equity share are
those shares which don't carry any special or
preferential rights in respect of payment of
annual dividend and repayment of capital the
money issued by the issue of equity shares is
limited as equity share capital .it represents as the
owners capital as equity share holders as are real
owners of the company thus the capital raised by
issue of such share is common as ownership
capital or owners fund.

67. Features
Risk bearing capital -
They are the primary risk bearers they enjoys the reward as
well as bear the risk of ownership .
.
Maturity -
Equity shares provide permanent capital to the
company and cannot be redeemed during the life
time of the company.

68. Returned
The returned earned by equity share
holder is known as dividends which
varies with the earning of the company.
Claim on residual income
Equity share holders are referred to a
individual owners, as they get dividend only
after all other claims on the companies income
and asset have been settled voting rights.

69. Voting rights
Equity share holders have voting rights in
proportion to the share held by the share
holders .they have a right to participate in the
companies management.
Limited liability-
The liability of equity share holders is limited
to the extent capital contributed by the
company.

70. Merits
IT IS IDEAL FOR ADVENTOROUS INVESTORS
Equity share are suitable who are willing to assume risk for
higher returns.
NO OBLIGATION AS TO DIVIDENDS
There is no burden or obligation on the company to pay dividend
as it depends on the profit available and the decision of members
PROVIDES CREDIT STANDING
Equity capital provide credit worthiness to the
company and confidence to prospective loan providers

71. No charge on asset
Equity shares do not carry any charge
on asset of the company as a result asset can
be freely mortgaged purpose of borrowing.
Democratic management
Equity shares holders enjoys voting rights
which ensure democratic management of the
company.
Small nominal value
An equity share is generally low price as
a result ,even person with limited means can buy
equity shares.

72. DEMERITS
Risk of fluctuating return-
Equity shares are not suitable for investors who
desire to earn stable return on the investments as equity share get
fluctuating results.
High cost of capital
The cost of equity shares is generally more as compared to the
cost of raising funds through other sources.

73. Legal formalities
A company has to comply with no legal formalities
before issue of equity shares to the general public.
Danger of over capitalization
Equity share capital is a permanent source of capital
if the company has raised excess equity capital due
to faulty financial planning then company may get into a
state of overcapitalization. in such a situation
equity capital may become idle and under utilized.

74. PREFRANCE SHARE
Preference share are those shares which enjoy
certain priorities
regarding the payment of dividend under fixed
rate and return of
investment the capital raised by issue of
preference share is called preference share
capital the preference share holders enjoy
preferential rights over equity share holders

75. Right to receive fixed rate of dividend before any
dividend is paid to equity share holders
Right to receive repayment of capital on binding up
of company before the capital of equity share
holders is a returned.

76. FEATURES
FIXED RATE OF DIVIDENT :
Preference share holders receive dividend
at a fixed rate before any dividend is paid to equity
share holder.
REPAYMENT OF CAPITAL
Preference share holders have the preferential
rights as to the redemption of capital at the of
time binding up of a company

77. NO VOTING RIGHTS:
Preference shareholders generally do not enjoy any
voting rights.
NO CHARGE ON ASSET
Preference shares are also used without creating any
charge on the fixed assets of the company

78. TYPES OF PREFRANCE
CUMULATIVE PREFRANCE SHARES
The preference shares which carry the right to accumulate
unpaid dividend in future years in case the same is not paid
the current year are termed as cumulative preference shares
example: if a company is having a loss for 2 years and if the
3 year the company earns the profit than the cumulative
preference shares holder with get dividend for 3 years

79. NON CUMALATIVE PREFRANCE SHARES
The preference shares on which the dividend does not get
accumulated are termed as non cumulative preference shares. if the
company does not declare dividend for any year right of dividend of such
shares holders in respect of that year will be lost.
PARTICIPATING PREFRANCE SHARES
The preference share in which share holder are granted the right to
share or participate in the surplus profit of the company after paying
dividend in equity shares are termed as participating preference shares

80. NON PARTICIPATING PREFRANCE SHARES
The preference share in which share holder don't carry the
privilege participation of surplus profit along with equity shares
are termed as non participating preference shares
CONVERTABLE PREFRANCE SHARES
The preference shares that can be converted into equity
shares within specified period of time are known as convertible
preference shares

81. NON CONVERTABLE PREFRANCE SHARES
Preference shares that cannot be converted
into equity shares are known as non convertible
preference shares

82. MERITS
REASONABLE SAFETY OF RETURN
Preference share are useful for those investors who want
steady income in the form of fixed rate of return and safety of
investment.
NO INTERFERENCE IN THE MANAGMENT
Preference shares don't affect the control of equity
share holders over the management as preference share
holders don't carry voting rights.

83. TRADING ON EQUITY
The preference shares are entitled to a fixed rate of dividend
.It enables the company to declare higher dividend to equity
share holders during prosperity to take advantages of trading
on equity
NO CHARGE ON ASSET
Preference capital does not create any short of charge
against a asset of a company . so ,assets may be used as
security for raising loans in future.

84. Demerits
LIMITED CAPITAL
Preference shares are not suitable for adventures or bold
investors who are willing to take risk &are interested in higher
returns .
DILUTE CLAIM OF EQUITY SHARES HOLDERS:
Preference capital dilutes the claim of equity share holders over
the asset of the company.

85. UNRELIABLE AND LOW RETURN
Preference shares carry a fixed but low return of
dividends even during bumper profits preference share holders have
to be satisfied with a fixed dividend while equity shares holders
get more share in profit. More over their is no assured return for the
preference share holders as dividend is paid only when
the company earns profit.
NO TAX BENEFITS:
Their is no tax saving in case of dividend on preference
shares as they are not deductible from profits as expenses.

86. Debentures
Debentures are the common security issued
under borrowed fund capital. Debentures
are instrument for raising long term debt
capital . Debentures are called creditorship
securities because debentures holders are
called creditors of the company.
A debenture can be defined as “a documenter
a certificate “ issued by a company under
its seal as an acknowledgement of its debt .
Holder of debenture certificate is debenture
holder.

87. Features
Borrowed fund-
Debentures are part of borrowed
fund capital as debenture holders are considered as
the creditor of the company .
Fixed rate of interest-
The interest on debentures is paid at a
fixes rate. The rate of interest is decided in the
annual general meeting of the company .

88. Compulsory payment of interest-
Payment of regular and fixed rate of interest is a legal
obligation of the company. company has to pay interest to its
debentures –holders irrespective of its profit earning capacity.
Security –
Most of the time debentures are issued against the charge of
some fixed assets of the company.
No voting rights-
Debenture holder have no say in the management as
they are never granted voting rights in the company.

89. Types
Secured debentures
Unsecured debentures
Convertible debentures
Non -convertible debentures

90. Secured debentures
Debentures which are secured by a charge on
the immovable property of the company are
known as secured debentures. In case of
default by the company ,debenture-holders
can recover money from the mortgaged
property.

91. Unsecured debentures
Debentures which are unsecured and do not carry a
charge on the fixed assets of the company . No
property is mortgaged with the debentures holder.
In case of default they can file a case in the
court but can not recover money by selling a asset
of the company.

92. Convertible Debentures
The debentures which get converted into equity
shares on expiry of fixed of time are known as
convertible debentures.
The ratio and period of conversion is specified at
the time of issue of debentures.

93. Non –Convertible Debentures
The debentures which do not get converted into
equity shares are known as Non- Convertible
Debentures. They always remain the creditor of
the company.

94. Merits of Debentures
Low cost -
The cost of raising debentures is less than the cost of
raising preference shares. It’s a cheaper source of finance.
Interest is treated as expense-
The interest paid to debenture holder is considered as
an expense of the company. Interest is deducted from the
total income of the company before calculating income tax .
So the liability of the tax reduces.

95. Attract large number of investors-
The company offers a fixed rate of interest on debentures. The fixed returns
appeals and attracts many investors in invest in debentures. Hence the
company can collect a large amount of funds by issue of debentures.
No dilution of control-
Debenture holder do not get any voting rights. They are not allowed
to participate in decision – making so debentures financing does not
result in the dilution of control of equity share holder.

96. Demerits
Fixed obligation –
Payment of interest is a fixed commitment of the
organization whether its earning profit or not.
sometimes companies have to borrow funds for
payment of interest to debenture holder.
Reduction in credibility-
Financial institution and lenders hesitate to lent funds in
the company more of debentures. The credit worthiness of
the company which has issued a large number is low.

97. Charge on assets-
Usually debentures are issued against securities
of fixed asset . During the time of depression , if the company
is unable to pay the regular amount of interest and finds
its difficult to repay the amount , in this situation the
debentures holder can have claim over the assets of the company.
No voting rights-
Debentures holder are not allowed to vote in the management
of the company . All the decision regarding interest rate for debentures
are taken by the share holder only . Therefore they remain at the
mercy of equity shareholder.

98. Commercial bank
Commercial banks occupies a very important
position as they provide funds for different
purpose and different periods .firms of all
size can approach commercial banks
generally commercial banks can provide
short and medium term loans but nowadays
they have started giving long term loans
against security.

99. Merits
Banks provide funds to firm as and when required .
The banks keep the information of borrower
confidential and the business can maintain
its security.

100. No formalities of issue of prospects etc. are
required so its very easy and economical
source of funds.
It’s a flexible source as loan amount can be
increased as well as decreased .

101. Demerits
Funds are generally available for a short
period .
Banks make detailed investigation of the
company's affairs and financial structure
before issue of loans.
In some cases bank may put restrictions and
difficult terms and condition.

102. Financial institutions
Public financial institution are referred to as
lending institutions ,development banks or
financial institutions . After independence
the government of India realised that
economical development of a country only
commercial banks are not sufficient . There
must be financial institution to provide
financial assistance and guidance to
industries and business enterprises . The
need for public financial institution was felt
due to the following reasons:

103. Merits
Long term finance –
Financial institution provide long term finance.
Managerial advice-
Financial institution provide managerial as well as financial advice
on various matters.
Medium and long term finance-
Public financial institutions provide medium and long term finance to
industrial enterprise at a reasonable rate of interest

104. Demerits
Too many formalities have to be fulfilled for taking loans from
financial institution .
They may put certain restriction such as restriction on dividend
payment etc.
Sometimes financial institution may appoint there nominees as
board of directors to restrict the power of a company.

105. International source of finance
Prior 1991,indian companies were not allowed to raise
finance from abroad or from companies .the source
of finance were restricted within India .after the
new policy of liberalisation ,the doors of foreign
companies and investors were opened to invest in
Indian companies .after 1991 the Indian companies
can tape international source of finance for both
debt and equity .the main securities used by Indian
companies to tap international source of finance are
given below:

106. Loans from commercial banks.
International agencies and
development banks.
International capital market

107. Loans from commercial banks
Commercial banks are very popular and common
source of medium term finance for companies .
Medium term loans can be raised by companies
against the security of assets . The rate of interest
of loans is generally fixed by R.B.I.nowadays with
the entry of foreign banks and private banks
.taking loans from commercial banks has
become very simple task .banks don't interfere in
the management of companies and such loans
can be repaid in parts and interest can be saved
to that extent.

108. International agencies and
development banks
A number of international agencies and
development banks have emerged over the years
to finance international trade . These bodies
provide long term and medium term loans to
promote the development of economically
backward areas in the world . These bodies are
set up by the government of developed countries
. For example .international finance corporation
,EXIM.banks.asian development banks.

109. International capital market
Modern big and multinational
organizations get themselves listed
in the foreign stock exchange and
the commercial financial
instruments used for this purpose
are:

110. Global depository receipt [GDR].
American depository receipt [ADR]
Foreign currency convertible bonds [FCBs]

111. GDR
GDR receipts are issued against issue of equity
shares in the global market . These are indirect
equity offerings. The equity shares issued
against GDR are held by an international banks
called depository. Companies issue dividend
notices ,reports etc. regarding these shares do
not get voting rights . The capital contributed by
these shares is in dollars . That’s is why these
are called dollar –denominated instruments. The
global depository receipts were introduced by
the Citi bank in the year 1990.

112. ADR
An ADR is just like a GDR except that it can be
issued to a citizen of USA only and it can be
listed in the US stock exchange . Shares
issued by the company are held by an
international bank called depository ,which
receives dividend notices and reports . ADRs
are subject to much strict disclosure
requirements than GDRs . Because regulation
of us stock exchange are very strict . Annual
legal and accounting cost of maintaining an
ADR are much higher than GDR.

113. Fcbs
These are the foreign currency bonds which
get converted into equity shares on equity
shares on expiry of a fixed period of time .
The holders of FCB have the option of either
convert the FCB in equity shares at a
predetermined price or at the exchange rate
at that time . FCB get rate of interest and
these are traded by listing in foreign stock
exchange.

114. Factors kept in mind before
selecting a suitable source of
business finance
No source of business is free from limitation so we
cant say which is the best source of finance . Before
deciding the source of finance to meet financial
requirements.

115. Cost involved
Before finalizing any source of finance the
company must find out the cost involved
in procurement and using the funds . Both
the cost must be less than the benefit
which they get by using that source of
funds

116. Financial capacity of the firms
If the firm is financially sound then it may
prefer borrowed funds and can easily pay
the interest amount . But is the firm is not
financially stable then it must depend
upon the owners fund securities

117. Form of business organization
Sole proprietorship and partnership firm can
not raise funds by issue of shares
/debentures .they have to depend upon
factoring ,leasing,loan,trade credit
etc.whereas joint stock company prefer
issue of shares and debentures to raise
funds.

118. Time period
Another factor which help in deciding the
source of funds in the duration for which the
firm require funds as for a short period trade
credit , factoring,short term loans etc.are
suitable whereas for a long term shares
,debentures are suitable debentures are
suitable for medium term public deposits,
loans are suitable.

119. Risk involved
Owners fund securities involve no risk
whereas borrowed fund securities are risky
securities . If a business firm can bear the
risk then only it should to go for borrowed
funds otherwise it should prefer owner's
fund securities

120. Control
Equity shareholder are consider as the real
owner of the business as they have
complete control over the business . If
existing equity shareholder do not want to
lose the control , then they must not issue
more equity shares to reuse additional
capital as it may result in dilution of control.

121. Flexibility
Sometimes the financial institution which
provide long term debt to companies put
certain restrictions on the companies which
restricts the flexibility of company .so if
other option are easily availed then firm
don’t prefer loan from financial insitution
and bank put restriction .

122. Claim over assets
Some source of finance mortgage the assets
of the firm and reduce its creditworthiness
,for example debentures , secured
loans.wheras some source such as shares
,unsecured loans etc. don’t put claim over
the assets, hence result in no reduction in
creditworthiness.

123. Tax benefits
Interest on debentures ,loans is deducted from
the total income of the company before
calculating income tax whereas dividend paid
to equity shareholder is not deducted from
the total income . So if a firm wants to get tax
benefit it should issue debentures,
preference shares,loans,
public deposits etc.