Business Finance


Meaning and Introduction

Finance plays an important role in the economic development of a nation. Finance is called the life blood of business. Finance is the money which is used to run a business, an activity or any project.

finance is needed to accelerate the rate of economic development, rate of industrialisation, rate of etc. So, overall development of a nation depends on finance available in the country. Finance can be agricultural development, to build infrastructure, for human development and protecting environment,savings, credit raised through commercial banks, development banks/financial institutions, funds raised through capital market, money market in the form of shares, debentures, bonds, securities, public deposits, etc. Foreign sources refer to raising finance through foreign nations. It can be in the form of foreign direct investment, portfolio investment, foreign collaboration, loan from foreign governments,international financial institutions, NRI deposits, foreign aid etc. In business, funds are needed both for long-term and short-term requirements. This requirement can be in the form of fixed capital or working capital.

(1) Fixed Capital: Fixed capital is required to purchase long-term assets like land and building,

plant and machinery, furniture and fixtures, etc. This capital is raised through long-term

sources of finance like shares, debentures, long-term loans, retained earnings, etc.

(ii) Working Capital: This capital is required for short-term and it is invested in current assets. It is required for meeting day-to-day expenses and for smooth running of business. This capital is invested in stock of raw material, semi-finished goods, finished goods, debtors, etc. It is raised through short-term sources of finance like short-term loans from commercial banks,funds raised through money market, credit facility through supplier etc.

2. Sources of Business Finance

(1) Own Sources: Own sources refer to meeting requirements of the business with the own capital of businessman/entrepreneur, which is saved by him earlier. Generally, small-sized businessmen and cottage industries run their business through their own sources. They expand their business by reinvesting the profits earned from business. In India, sole trader,partnership firm, HUF, etc. are very common forms of business organisations. These usually run their business through their own sources.

Joint stock companies raise their own sources by issuing shares. The capital of the company is divided in small parts. These small parts are called shares

(2) Debentures: Like shares, companies also issue debentures to get fixed capital. However,of dividend. These shares are of two types: cumulative and non- cumulative. These shares management of the affairs of the company. Preference shareholders are entitled to a fixed rate purchased by those investors who are willing to undertake risk. They have right to vote in the common source of finance in India Through shares, very huge amount of capital can be ecied. Shares are of two types-Equity Shares and Preference Shares. Equity shares help in meeting the long-term requirements of the company there is no fixed time for returming the amount. Registered debentures bear the name debenture-holder. These are registered with the company, while bearer debentures do bear the name of debenture-holder. These are easily transferable.

(3) Loans from Industrial Financial Institutions: In the field of providing indushl Development Bank of India (SIDBI), Industrial Finance Corporation (IFC), Export Imp Bank of India (EXIM Bank), Industrial Investment Bank, State Finance Corporations, ete These financial institutions provide long-term loan to industries. The rate of interest charmed by these institutions is less in comparison to commercial banks. These institutions play significant role in the industrial development of a nation. These institutions provide credit concessional rates for the development of backward areas. The detail of these financial institutions is given separately in this chapter.

(4) Loans from Commercial Banks: Commercial banks have an important role to play in the financial system of a country. These banks mainly provide short-term loans. These bank accept deposits from the depositors and provide loans to trade, industry and commerce

They get interest on loans. Different forms of bank loan are: overdraft, cash credit, loans and advances, etc. Commercial banks are of following types:

(i) Public Sector Banks: These banks are owned, controlled and managed by the government. In 1969 and 1980 total 20 banks (14 +6 respectively) were nationalised Later with the merger of New Bank of India with PNB, this number reduced to 19. All these banks are now included in public sector category. In November 2013, Bhartia Mahila Bank has been established in the public sector. Besides these, State Bank of India and its five subsidiaries are also included in public sector banks. In March 2014,there were 27 public sector banks in India. [Earlier SBI had seven subsidiary banks, now its two subsidiaries named State Bank of Indore and State Bank of Sourashtra are merged with SB

(ii) Private Sector Banks: These banks are owned, controlled and managed by the private sector. There are 20 banks in the private sector e.g. HDFC Bank, ICICI Bank Kotak Mahindra Bank, Axis Bank, Federal Bank, Yes Bank, Indusind Bank, etc.

(iii) Cooperative Banks: These banks are operated by a group of private individuals and function on the principle of cooperation. Main objectives of these banks are to make easy availability of rural credit and to encourage self-help among the economicaly weaker sections of the society. Like commercial banks, these also accept deposits aprovide loans. In March 2013, 1,606 urban cooperative banks were operating in Indie106Business Finance

(iv) Foreign Banks: Upto March 2014, 43 foreign banks had their branches in India,e.g. Citibank, Standard Chartered Bank, ABN-Amro Bank, American Express Bank,Hongkong and Shanghai Banking Corporation (HSBC Bank), Barclays Bank,Royal Bank of Canada, Deutsche Bank, etc.

(5) Public Deposits: Public deposits refer to deposits accepted by corporate sector and non-banking financial institutions from public. These are usually unsecured. As per RBI guidelines, no company can accept public deposits for a period more than three years.

Moreover, the company accepting the public deposits will have to fulfil conditions and guidelines of RBI.

(6) Commercial Papers (CPs): The commercial papers can be issued by companies with a networth of at least 35 crore. The CPs are issued in multiple of 3 1 crore. The maturity of CPs is between 3 to 6 months. These are issued at a discount to the face value.

(7) Foreign Sources: With increasing globalisation, foreign sources have also become significant for financing business requirements

. The foreign sources can be in the form of foreign direct investment, portfolio investment, loans from foreign banks, foreign government, international financial institutions, etc. External/foreign sources of finance can be classified as under:

(i) Foreign Investment: Foreign investment refers to that investment which is made by the individuals or foreign companies in the private or public institutions of anothercountry.

 It is of two types:

(a) Foreign Direct Investment (FDI): Foreign direct investment is made by foreign investors with a view to establish companies with full ownership and management in other countries or participating in share capital and managing the affairs of companies of other countries. Besides, it is the foreign investor who undertakes the risk and is exclusively responsible for profit and loss.

(b) Portfolio Investment: In this kind of investment, foreign investors purchase shares of the domestic companies. Management and control remain with the domestic companies. Foreign investors are guaranteed assured interest or dividend. In this type of investment, investor does not undertake any risk nor does he participate in management. Main Business Finance management

(ii) Foreign Collaborations: In this case, foreign and domestic entrepreneurs jointlye stablish an enterprise called Joint Venture. It is of three kinds: (a) Collaborationbetween private companies; (b) Collaboration between the government and private foreign companies; and (c) Collaboration among governments of different countries.

(iii) Loan from Foreign Government: In this case, loans are raised from government of another country.

(iv) Loan from International Institutions: International institutions like World Bank,International Finance Corporation, International Monetary Fund, Asian Development Bank, etc. also provide loans in foreign currencies. Loans are given both to public and private sectors.