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Chapter 8 of NCERT Class 11 Business Studies deals with different sources from which a business can raise funds to meet its short-term, medium-term and long-term requirements. It explains the meaning of business finance, classification of sources (owner’s funds and borrowed funds, internal and external sources, short-term and long-term sources), features of equity shares, preference shares, debentures, retained earnings, trade credit, factoring, lease financing, public deposits, commercial paper, ADR/GDR and the role of special financial institutions like IFCI, SFC, IDBI, etc. These solutions are written in simple, easy-to-understand language and are completely aligned with the latest CBSE pattern and NCERT textbook.
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NCERT Solutions Class 11 Business Studies Chapter 8: Sources of Business Finance
This section provides detailed and student-friendly answers for the Class 11 Business Studies Chapter 8 exercise questions. Each answer is explained clearly to strengthen understanding and exam preparation.
Exercise
Short Answer Questions
1. What is business finance? Why do businesses need funds? Explain.
Business finance refers to the money required by a business to carry out its different activities. It is also called the funds or capital employed in the business.
Businesses need funds for the following reasons:
- To purchase fixed assets like land, buildings, machinery, furniture, etc. (long-term needs).
- To meet day-to-day expenses such as the purchase of raw materials, payment of wages, electricity bills, etc. (short-term need).
- For modernisation, expansion and diversification of the business.
- To pay taxes, dividends, interest and other obligations on time. Without adequate finance, no business can survive or grow.
2. List sources of raising long-term and short-term finance.
Sources of long-term finance:
- Equity shares
- Preference shares
- Retained earnings
- Debentures
- Loans from financial institutions (IFCI, IDBI, SFC, etc.)
- Loans from commercial banks (long-term)
- International financing (ADR, GDR, FDI)
Sources of short-term finance:
- Trade credit
- Factoring
- Bank credit (overdraft, cash credit, discounting of bills)
- Commercial paper
- Public deposits (for short periods)
3. What is the difference between internal and external sources of raising funds? Explain.
Here is the difference between internal and external sources of raising funds that will help you understand the concept.
| Basis | Internal Sources | External Sources |
| Meaning | Funds generated from within the business | Funds raised from outside the business |
| Examples | Retained earnings, depreciation fund | Shares, debentures, bank loans, trade credit, public deposits |
| Control | No dilution of control | May lead to dilution of control (in case of equity shares) |
| Cost | Usually lower cost | Higher cost because of interest/dividend |
| Obligation | No compulsory payment obligation | Fixed obligation to pay interest/dividend |
| Source of generation | From business operations | From outsiders (investors, banks, institutions) |
4. What preferential rights are enjoyed by preference shareholders? Explain.
Preference shareholders enjoy the following preferential rights:
(i) They get a fixed rate of dividend before any dividend is paid to equity shareholders.
(ii) At the time of winding up of the company, they get their capital repaid before equity shareholders (after payment to creditors).
(iii) In case of cumulative preference shares, arrears of dividend are paid before paying anything to equity shareholders.
(iv) Some preference shares (participating) also give the right to participate in surplus profits after paying a certain dividend to equity shareholders.
Because of these rights, preference shares are safer than equity shares but do not carry voting rights.
5. Name any three special financial institutions and state their objectives.
Here are the three special financial institutions which you should know about:
(i) Industrial Finance Corporation of India (IFCI): To provide medium and long-term credit to large industrial enterprises, especially in situations where normal banking facilities are not available.
(ii) State Financial Corporations (SFCs): To provide financial assistance to small and medium-scale industries within their respective states.
(iii) Industrial Development Bank of India (now IDBI Bank): To provide direct and indirect financial assistance for industrial development, promote institutions, and coordinate the working of other financial institutions.
6. What is the difference between GDR and ADR? Explain.
The difference between the GDR and ADR is explained in the table below:
| Basis | American Depository Receipt (ADR) | Global Depository Receipt (GDR) |
| Meaning | Receipts issued by a US bank against shares of an Indian company | Receipts issued by an overseas bank (outside the USA) against shares of an Indian company |
| Place of issue & trading | Issued and traded only in the USA market | Issued and traded in international markets (Europe, Asia, etc.) except the USA |
| Listed on | American stock exchanges (NYSE, NASDAQ) | European or Asian stock exchanges |
| Currency of trading | US dollars | Euro or any other foreign currency |
| Approval required | From the US authorities | From the authorities of the country where it is issued |
Also Read: CBSE Class 10 Economics Chapter 3 NCERT Solutions
Long Answer Questions:
1. Explain trade credit and bank credit as sources of short-term finance for business enterprises.
Trade credit is the credit given by one businessman to another for the purchase of goods and services. When a supplier allows 30–90 days to the buyer to make payment, it is called trade credit.
Merits: Easy availability, no security required, and helps in maintaining inventory.
Limitations: Available only for a limited amount and a short period, the cost becomes high if the discount for early payment is lost.
Bank credit: Commercial banks provide short-term finance in the form of overdraft, cash credit, discounting of bills and short-term loans. Here are the three types of bank credit:
- Overdraft: The Customer can withdraw more than the balance in the current account up to a sanctioned limit.
- Cash credit: A separate loan account is opened, and the borrower can withdraw as and when required.
- Discounting of bills: The Bank gives money against bills of exchange before their maturity, after deducting some discount. Merits: Flexible, quick availability, interest only on the amount used. Limitations: Requires security or collateral; banks may refuse if creditworthiness is low.
2. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.
A large industrial enterprise can raise funds for modernisation and expansion from the following sources:
(i) Equity shares: Permanent capital, no fixed burden, suitable for large amounts.
(ii) Preference shares: Fixed dividend, no dilution of control.
(iii) Debentures: Cheaper than shares because interest is tax-deductible.
(iv) Retained earnings: Most convenient and cheapest source, no cost of issue, no dilution of control.
(v) Term loans from banks and financial institutions: Fixed repayment schedule, interest tax-deductible.
(vi) International financing (ADR/GDR/FDI): Large amounts can be raised from foreign markets without dilution of control (in case of FDI).
(vii) Lease financing: Assets can be acquired without purchasing them outright.
The choice depends on cost, control, risk, purpose and period of finance required.
3. What advantages does the issue of debentures provide over the issue of equity shares?
The issue of debentures has the following advantages over equity shares:
(i) Cheaper source: Interest on debentures is tax-deductible, whereas dividends on equity shares are not.
(ii) No dilution of control: Debenture-holders have no voting rights, so existing owners retain full control.
(iii) Fixed obligation: Interest has to be paid only at a fixed rate, irrespective of profits, whereas equity dividend depends on profits.
(iv) Suitable during high profits: When profits are high, the burden of fixed interest is low compared to high dividend expectations on equity.
(v) Easier to issue for debt-oriented investors: Investors looking for regular fixed income prefer debentures.
(vi) Trading on equity: By using borrowed funds, equity shareholders can earn a higher return on their capital.
4. State the merits and demerits of public deposits and retained earnings as methods of business finance.
Here are the merits and demerits of the public deposits as given below:
Merits:
- Simple procedure, no heavy legal formalities.
- Cheaper than bank loans (lower interest rate).
- No dilution of control.
- Tax-deductible interest.
Demerits:
- Unreliable, the public may not respond when funds are needed most.
- A limited amount can be raised.
- Not suitable for new companies.
- Risky for depositors, so companies have to pay higher rates sometimes.
Here are the merits and demerits of the Retained Earnings as given below:
Merits:
- Cheapest source, no flotation cost.
- No dilution of control.
- Increases financial strength and creditworthiness.
- No fixed obligation of dividend or interest.
Demerits:
- Limited amount, depends on profits.
- Opportunity cost is high, shareholders expect a higher dividend.
- May lead to over-capitalisation if excessively used.
- Dissatisfaction among shareholders who want regular dividends.
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