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Business Finance is the 4th unit in the syllabus of commerce UGC NET 2022 examination. This article aims to give a brief introduction to the vast syllabus of commerce UGC NET 2022 paper. This article will cover the basics of business finance and help in the preparation of Business Finance for Commerce UGC NET notes.
Business finance means the capital availed by trade owners to meet their requirements that include starting a business, gaining top-up funds to finance business process, getting finance to buy capital assets for the firm or dealing with an unexpected cash shortage met by the enterprise.
Why is business finance important?
- Fixed Capital Requirement: To start an enterprise, capital is needed to buy permanent assets like land and building, machinery and other kinds of infrastructure. The money needed for acquiring fixed assets remains invested in the business for an extended period.
- Working Capital Requirement: A business needs money for its everyday functioning. It is referred to as working capital requirements. Working capital is needed for procuring raw materials, to pay salaries, wages, rent and taxes.
- Diversification: A firm needs more capital to expand its work to become a multi-product company e.g. ITC.
- Technology up-gradation: Investment is required to implement modern technology like computers in business.
- Growth and expansion: Advanced development of a business firm needs better investment in fixed assets
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Methods of Raising Finance
Share
The capital gained by the issuance of shares is called share capital. The capital of a firm is distributed into small units known as a share. The individual owning the share is called a shareholder. There are two kinds of the share; Equity share and preference share
Equity Share
Equity shares denote the proprietorship of a firm. They have the privilege to vote and to participate in the management.
| Merit | Demerit |
| Equity share capital is a vital resource of money for an extended time | Equity shareholders stand more risk as payment of equity dividends is not necessary. |
| For raising capital by issuing equity shares, a firm does not need to mortgage its assets. | The price of equity shares is larger than the price of preference shares. |
| Equity shareholders gain larger returns in times of high profits. | Issue of Equity shares takes more time. |
| They have the privilege to vote and to participate in the management. | Equity Shareholders are the chief risk bearers thus the claim of equity shares is more in the boom time. |
| Compensation of equity dividends is not obligatory. | ——————————- |
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Preference Share
They are considered safer in investment when compared to equity shares. They collect dividends at a sure rate. Preference shareholders could be considered the same as creditors. They do not possess any voting privileges.
| Share | Types |
| Preference shares | · Cumulative preference shares.
· Non-cumulative preference shares. · Participating preference shares. · Non-participating preference shares. · Convertible preference shares. · Non-Convertible preference shares. |
| Merits | Demerits |
| Preference shareholders investment is safe and they have the right to claim dividends and capital. | The rate of preference dividend is higher than the rate of interest on debenture. Hence, for a firm, it is an expensive source of funds than Debentures. |
| The firm is not required to mortgage its assets for the issue of preference shares. | Preference dividends cannot be subtracted from profit for income tax. Hence, no tax is saved. |
| It will not disturb the power of equity shareholders as they do not possess any voting privileges. | Preference shares will not suit the people who are willing to take the risk for more return. |
| They gain pre-set dividends. So, they are good for those stockholders who want a permanent rate of return. | The dividend on these shares will be paid only when the company earns a profit. Therefore, nominees may not find them very appealing. |
Debentures
Debentures are vital debt sources of finance for raising long term assets. Debenture owners get a secure rate of interest on Debentures. Interest is compensated every six months/a years. They are like creditors of a corporation.
| Types | |
| Debentures | · Secured Debentures
· Unsecured Debentures · Convertible Debentures. · Non-Convertible Debentures · Redeemable Debentures. · Registered Debentures. |
| Merits | Demerits |
| Debentures are preferred by those investors who do not want to take the risk and are interested in fixed income. | There is a larger gamble when there is no payment because interest on debentures has to be compensated even when the company suffers losses. |
| Debenture holders do not possess voting privileges. No control over the management. | The firm has to mortgage its capital to issue secured Debentures. |
| Debentures are less expensive when compared to the price of preference shares. | With the novel issue of debentures, the firm’s ability to further borrow funds decreases. |
| Interest on Debentures is an expense subtractable from tax (tax saving). | ———————— |
Retained Earnings
A fraction of a firm’s total profit left after tax and dividend, which is not distributed but are reserved for reinvestment is known as retained earnings. These are also known as sources of self-financing.
| Merits | Demerits |
| No charges in the form of interest, dividend, advertisement & prospects, to be suffered by the firm to get it. | It is an ambiguous supply of finance because it is accessible only when profits are high. |
| The firm does not have to mortgage its capital. | they cause discontent within the group of shareholders because they get a low dividend. |
| Development and growth of trade are probable by reinvesting the retained profits. | ———————– |
Public Deposits
The sums that are raised by firms directly from the public are called public deposits. The rate of interest proposed on public deposits are more than that proposed on bank deposits. This is controlled by the Reserve Bank of India and it should not exceed 25% of share capital and reserves.
| Merits | Demerits |
| The firm is not required to mortgage its assets. | The maturity time is brief. The firm cannot rely on them for long period. |
| Interest paid on them is tax-deductible and therefore there is tax saving. | The quantum of public deposit is restricted because of legal limitations. |
| The process for procurement of public deposits is easier than share and Debenture. | New firms usually find trouble to raise capital through public deposits. |
| They do not have voting privileges and hence the control of the company is not diluted. | ——————————- |
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Commercial Banks
Commercial Banks offer loans and advances to corporations in the form of money credit, overdraft loans and discounting of Bill. The rate of interest on the loan is permanent.
| Merits | Demerits |
| They give timely monetary assistance to firms. | capital is not available for the long term. |
| Confidentiality is upheld about loans obtained from Commercial Banks. | They require source security of assets before a loan is sanctioned. |
| This is the simpler source of finance because it is not essential to issue a prospectus for raising funds. | ————————————– |
Financial Institution
The state and central governments have founded many financial institutions to offer financial assistance to firms. They are known as development Bank. These are IFCI, ICICI, IDBI, LIC and UTI. etc.
| Merits | Demerits |
| They give long term financial assistance, unlike Commercial Bank. | The process of bestowing loans takes time because of inflexible rules and many formalities. |
| They offer monetary, administrative and technical guidance to the company | They place limitations on the firm’s board of Directors. |
| The loan can be compensated in simple instalments. It will not be much of a burden on the establishment. | ————— |
| Finance is made available even during times of depression. | ———————– |
Trade Credit
It is the credit offered by one trader to another for the acquisition of products and services.
| Merits | Demerits |
| It is an easily accessible source. | It has a danger of overtrading. |
| It encourages sales. | It is expensive. |
| It aids in rising inventory levels. | It can offer limited funds. |
| It has readily available | ——————– |
| It demands no charge on assets | ——————- |
International Source of Business Finance
- Commercial Bank: They give foreign currency loans to companies worldwide. Standard Chartered Bank is an eminent establishment for foreign currency loans to Indian business firms.
- International Agencies and Development Bank: Numerous international agencies and development Bank e.g. IFC, ADB, offer long term loans.
- International Capital Market
a) GDR: When the regional currency stocks of a firm are given to the depository bank, which issues depository receipt against shares, these receipts represented in US dollars are caller GDRs.
b) ADR: The depository receipt supplied by a firm in the USA are called ADRs (American Depository Receipts)
c) Foreign Currency Convertible Bonds (FCCBs): They are dispensed in a foreign currency and bring a set interest rate. They are listed and traded in the foreign stock exchange and is the same as the debenture.
d) Indian Depository Receipts (IDRS): They are like GDR or ADR but the issuer is a foreign firm raising capital from Indian Market. IDRS are rupee governed. These are listed on any Indian stock Exchange.
e) Inter-Corporate Deposits (ICD): They are not secure temporary deposits made by one firm with another firm. These deposits are fundamentally brokered deposits, which means brokers are involved. The rate of interest on these deposits is more than that of banks and other markets. The major benefit of ICDS is that the deal is free from legal disturbances.
Important terms in Business Finance for Commerce UGC NET 2022
- Owner’s Funds: These are the resources provided by the owner of the business firm.
- Factoring: This is a financial service below which the factor discounts the bills of exchange of the customers and gathers his debts and also gives him data on the creditworthiness of a prospective consumer. He charges payments for the services provided.
- Borrowed Funds: These are the finance raised by loans.
- Zero Interest Debenture (ZID): They do not convey any obvious rate of interest. But they are dispensed at discount and cashed at a premium or par. It is the profit on the debenture.
- Lease Financing: A lease means a contractual agreement, in which the proprietor of the property bestows the other party the privilege to utilize the capital in return for regular compensation, but holds the ownership over the property.
- Commercial Paper: This is a non-secured promissory note dispensed by a company to raise capital for a short time, ranging from 90 days to 364 days.
The above article will give you a brief idea about the content of the syllabus for the topic Business Finance for Commerce UGC NET 2022 . It will also help you with the preparation of quick revision notes for Business Finance. Download the Entri app for more preparation strategies and PDF notes for commerce UGC NET 2022 paper 1 and 2.
