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Sources of Business Finance

NCERT Class 11 · Business Studies Based on NCERT Class 11 Business Studies textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explains the meaning, nature, and importance of business finance, which is the lifeblood of any business. It provides a comprehensive classification of sources of funds based on period, ownership, and generation, and then details each source—from retained earnings and trade credit to shares, debentures, and international financing. The one big idea a student must walk away with is that there is no single best source of finance; the choice depends on factors like cost, risk, control, purpose, and period of requirement.
Key Concepts (19)
Business Finance
The requirements of funds by business to carry out its various activities is called business finance.
e.g. A restaurant owner needs funds to buy kitchen equipment (fixed capital) and to pay salaries and buy vegetables daily (working capital).
Fixed Capital Requirements
Funds required to purchase fixed assets like land and building, plant and machinery, and furniture and fixtures, which remain invested in the business for a long period.
e.g. A manufacturing company needs large fixed capital to buy factory machinery, whereas a trading shop needs less fixed capital for shelves and a counter.
Working Capital Requirements
Funds required for day-to-day operations, used for holding current assets such as stock of material, bills receivables, and for meeting current expenses like salaries, wages, taxes, and rent.
e.g. A business selling goods on credit needs more working capital to cover expenses while waiting for payment from customers.
Owner's Funds
Funds that are provided by the owners of an enterprise, which may be a sole trader or partners or shareholders of a company, including capital and profits reinvested in the business.
e.g. Money invested by Mr. Anil Singh from his personal savings to start his restaurant is owner's funds.
Borrowed Funds
Funds raised through loans or borrowings, which have to be repaid after a specified period with a fixed rate of interest, often secured against fixed assets.
e.g. Mr. Singh taking a bank loan to expand his restaurant chain is an example of borrowed funds.
Retained Earnings
A portion of the net earnings that is retained in the business for use in the future, also known as internal financing or 'ploughing back of profits'.
e.g. A company that earns ₹10 crore profit and distributes ₹4 crore as dividends, keeping ₹6 crore in the business, is using retained earnings.
Trade Credit
The credit extended by one trader to another for the purchase of goods and services, appearing in the buyer's records as 'sundry creditors' or 'accounts payable'.
e.g. A restaurant buying vegetables from a supplier and paying after 30 days is using trade credit.
Factoring
A financial service under which the 'factor' renders services including discounting of bills and collection of the client's debts, with the receivables sold to the factor at a discount.
e.g. A textile manufacturer sells its ₹5 lakh invoice to a factor at a 2% discount and receives immediate cash, while the factor collects the full amount from the buyer.
Lease Financing
A contractual agreement whereby the owner of an asset (lessor) grants the other party (lessee) the right to use the asset in return for periodic lease rental payments.
e.g. A company leasing computers for 3 years instead of buying them outright, paying monthly rentals to the leasing company.
Public Deposits
Deposits that are raised by organisations directly from the public, usually offering higher interest rates than bank deposits, for a period up to three years.
e.g. A company inviting the public to deposit money for 2 years at 9% interest per annum, issuing a deposit receipt as acknowledgment.
Commercial Paper (CP)
An unsecured money market instrument issued in the form of a promissory note, introduced in India in 1990, with maturities between 7 days and one year.
e.g. A highly rated company like Reliance issues CP worth ₹100 crore for 90 days to meet short-term fund requirements.
Equity Shares
Shares that represent the ownership of a company; equity shareholders are 'residual owners' who receive what is left after all other claims are settled, and they have voting rights.
e.g. A person buying 100 equity shares of Infosys becomes a part-owner of the company and can vote in shareholder meetings.
Preference Shares
Shares that enjoy a preferential position over equity shares in receiving a fixed rate of dividend before any dividend for equity shareholders, and in repayment of capital at liquidation.
e.g. A company issues 10% preference shares; the holder gets a fixed 10% dividend every year before equity shareholders get anything.
Debentures
An instrument for raising long-term debt capital, acknowledging that the company has borrowed a certain amount of money which it promises to repay at a future date, with a fixed rate of interest.
e.g. A company issues 8% debentures of ₹100 each; the debenture holder receives ₹8 interest annually and gets the ₹100 back at maturity.
Global Depository Receipts (GDRs)
Depository receipts denominated in US dollars, issued abroad by an Indian company to raise funds in foreign currency, listed and traded on a foreign stock exchange.
e.g. Infosys issued GDRs to raise funds from international investors; each GDR represents a certain number of Infosys shares.
American Depository Receipts (ADRs)
Depository receipts issued by a company in the USA, bought and sold in American markets like regular stocks, issued only to American citizens.
e.g. An Indian company like ICICI issues ADRs listed on the New York Stock Exchange for US investors.
Indian Depository Receipt (IDR)
A financial instrument denominated in Indian Rupees in the form of a Depository Receipt, created by an Indian Depository to enable a foreign company to raise funds from the Indian securities market.
e.g. Standard Chartered PLC issued IDRs in India in June 2010, allowing Indian residents to invest in the foreign bank.
Foreign Currency Convertible Bonds (FCCBs)
Equity linked debt securities issued in a foreign currency that are to be converted into equity or depository receipts after a specific period, carrying a fixed interest rate lower than similar non-convertible debt.
e.g. A company issues FCCBs worth $50 million; investors can either convert them into equity shares after 3 years or keep the bonds and receive interest.
Inter Corporate Deposits (ICD)
Unsecured short-term deposits made by a company with another company, used for short-term cash management, with a minimum period of 7 days and maximum of one year.
e.g. Company A has surplus cash and deposits ₹10 crore with Company B for 3 months at a higher interest rate than bank deposits.
How It Works
Classification of Sources of Funds on the Basis of Period
  1. Identify the time period for which funds are required: long-term (over 5 years), medium-term (1 to 5 years), or short-term (up to 1 year).
  2. For long-term needs (e.g., buying fixed assets), use sources like shares, debentures, long-term loans from financial institutions.
  3. For medium-term needs (e.g., modernisation), use sources like commercial bank loans, public deposits, lease financing.
  4. For short-term needs (e.g., financing current assets), use sources like trade credit, commercial paper, bank overdrafts.
💡 Students often confuse medium-term with long-term. Remember: medium-term is 1-5 years, long-term is over 5 years.
Classification of Sources of Funds on the Basis of Ownership
  1. Determine whether the funds are provided by owners or by lenders.
  2. Owner's funds include equity share capital and retained earnings; these are permanent and do not need to be repaid during the life of the business.
  3. Borrowed funds include debentures, loans from banks and financial institutions, public deposits, and trade credit; these must be repaid after a specified period with interest.
💡 Owner's funds give control and are risky for owners; borrowed funds create a fixed burden of interest but do not dilute control.
Classification of Sources of Funds on the Basis of Source of Generation
  1. Identify if funds are generated from within the business (internal) or from outside (external).
  2. Internal sources include retained earnings, accelerating collection of receivables, and disposing of surplus inventories.
  3. External sources include issue of shares and debentures, loans from banks and financial institutions, public deposits, trade credit, and factoring.
💡 Internal sources are limited and cheaper; external sources can raise large amounts but may be costly and require security.
Factoring Process
  1. A firm sells its receivables (invoices) on account of sale of goods or services to a factor at a certain discount.
  2. The factor provides immediate cash to the firm (advance finance).
  3. The factor takes over responsibility for credit control and debt collection from the buyer.
  4. Under recourse factoring, the firm bears the risk of bad debts; under non-recourse factoring, the factor assumes the entire credit risk.
💡 Factoring is not the same as bill discounting; factoring includes collection and credit management services, not just financing.
Lease Financing Process
  1. The lessor (owner of the asset) and lessee (user) enter into a lease agreement.
  2. The lessee pays a fixed periodic amount called lease rental to the lessor for the use of the asset.
  3. The lessee uses the asset for the specified lease period but never becomes the owner.
  4. At the end of the lease period, the asset goes back to the lessor.
💡 Lease financing does not create any charge on the lessee's assets, and the risk of obsolescence is borne by the lessor.
Issue of Global Depository Receipts (GDRs)
  1. An Indian company delivers its local currency shares to a depository bank abroad.
  2. The depository bank issues depository receipts (GDRs) denominated in US dollars against these shares.
  3. The GDRs are listed and traded on a foreign stock exchange.
  4. A holder of GDR can convert it into the number of shares it represents at any time.
💡 GDRs are issued abroad, denominated in US dollars, and are negotiable instruments. They are not the same as shares.
Exam Traps — Don't Make These Mistakes
⚠ Confusing 'Owner's Funds' with 'Internal Sources'
✗ Owner's funds are the same as internal sources because both come from within the business.
→ Owner's funds are classified on the basis of ownership (who provides the funds), while internal sources are classified on the basis of generation (where the funds come from). Owner's funds include equity and retained earnings; internal sources include retained earnings, but also other internally generated funds like accelerated receivables. They overlap but are not identical.
✓ Owner's funds are funds provided by owners (equity shares, retained earnings). Internal sources are funds generated from within the business (retained earnings, sale of surplus inventories, etc.). Retained earnings is both an owner's fund and an internal source.
⚠ Mistaking 'Trade Credit' as a Long-Term Source
✗ Trade credit is a long-term source of finance because it helps in purchasing goods without immediate payment.
→ Trade credit is a short-term source of finance, typically for a period of 30-90 days, not exceeding one year. It is used for financing current assets like inventory, not for long-term fixed assets.
✓ Trade credit is a short-term source of finance, used for purchasing goods and services without immediate payment, usually for a period of 30-90 days.
⚠ Thinking 'Preference Shares' Always Get Dividends
✗ Preference shareholders are guaranteed a fixed dividend every year.
→ Dividend on preference shares is payable only at the discretion of the directors and only out of profit after tax. If the company makes no profit, no dividend is paid. However, cumulative preference shares allow unpaid dividends to accumulate.
✓ Preference shareholders have a preferential right to receive a fixed rate of dividend before equity shareholders, but only if the company earns profit and the directors declare it. Unpaid dividends on cumulative preference shares accumulate.
⚠ Confusing 'Debentures' with 'Shares'
✗ Debentures are a type of share that gives ownership in the company.
→ Debentures are debt instruments; debenture holders are creditors of the company, not owners. They do not have voting rights and are paid a fixed interest regardless of profit. Shares represent ownership; shareholders are owners with voting rights.
✓ Debentures are long-term debt instruments acknowledging a loan; debenture holders are creditors who receive fixed interest. Shares represent ownership; shareholders are owners who receive dividends based on profits.
⚠ Assuming 'Commercial Paper' is Available to All Firms
✗ Any company can raise funds by issuing commercial paper.
→ Only financially sound and highly rated firms can issue commercial paper. New and moderately rated firms cannot use this source because CP is an unsecured instrument and investors rely on the issuer's credit rating.
✓ Only financially sound and highly rated firms can raise money through commercial paper. New and moderately rated firms are not in a position to use this method.
⚠ Mixing Up 'Recourse' and 'Non-Recourse' Factoring
✗ In recourse factoring, the factor bears the risk of bad debts.
→ In recourse factoring, the client (seller of receivables) is not protected against the risk of bad debts; the factor can recover the amount from the client if the buyer does not pay. In non-recourse factoring, the factor assumes the entire credit risk.
✓ Under recourse factoring, the client bears the risk of bad debts. Under non-recourse factoring, the factor assumes the entire credit risk and pays the full invoice amount even if the debt becomes bad.
Compare & Contrast
Nature of return and risk
Equity Shares
Preference Shares
Equity shareholders get fluctuating dividends based on profits and are residual owners bearing high risk; preference shareholders get a fixed rate of dividend (if declared) and have a preferential claim, making them lower risk.
Control and ownership
Debentures
Equity Shares
Debenture holders are creditors with no voting rights and do not participate in management; equity shareholders are owners with voting rights and control over management.
Source of generation
Internal Sources of Finance
External Sources of Finance
Internal sources are generated from within the business (e.g., retained earnings, sale of surplus inventories) and are limited; external sources come from outside (e.g., shares, debentures, bank loans) and can raise large amounts but may be costly and require security.
Market of issue
GDR (Global Depository Receipt)
ADR (American Depository Receipt)
GDRs are issued and traded on any foreign stock exchange (e.g., London, Luxembourg) and are denominated in US dollars; ADRs are specifically issued and traded only in the USA, listed on US stock exchanges, and can be bought only by US citizens.
Exam Focus
Marks pattern: 2 MCQs (1 mark each), 1 Short Answer (3 marks) on merits/limitations of a source, 1 Long Answer (5 marks) on classification or factors affecting choice, and occasionally a 1-mark very short answer on definition of a term.
Most asked: Classification of sources of finance (period, ownership, generation) · Merits and limitations of equity shares, preference shares, and debentures · Factors affecting the choice of source of funds · Difference between equity shares and preference shares · Difference between shares and debentures · Retained earnings as a source of finance · International sources: GDR, ADR, FCCB
Don't skip: Explain the factors affecting the choice of an appropriate source of finance (5 marks).; Distinguish between equity shares and preference shares (3 or 4 marks).; Explain any four sources of business finance with their merits and limitations (5 marks).; What are retained earnings? Discuss its merits and limitations (3 marks).
One-Line Revision (read aloud before the exam)
  1. Business finance is the lifeblood of any business, required for both fixed assets and day-to-day operations.
  2. Fixed capital requirements are for long-term assets like land and machinery; working capital is for current assets like stock and receivables.
  3. Sources of funds are classified on the basis of period (long, medium, short), ownership (owner's vs borrowed), and generation (internal vs external).
  4. Owner's funds include equity share capital and retained earnings; borrowed funds include debentures, loans, and public deposits.
  5. Retained earnings is a permanent, cost-free internal source but may cause shareholder dissatisfaction if overused.
  6. Trade credit is a short-term source from suppliers, convenient but costly and limited.
  7. Factoring involves selling receivables to a factor for immediate cash; non-recourse factoring transfers bad debt risk to the factor.
  8. Lease financing allows use of an asset without ownership; the lessor bears obsolescence risk.
  9. Public deposits are cheaper than bank loans but unreliable for new companies.
  10. Commercial paper is an unsecured short-term instrument for highly rated firms only.
  11. Equity shares represent ownership, give voting rights, and provide permanent capital with no fixed dividend burden.
  12. Preference shares have a fixed dividend and preferential claim but no voting rights.
  13. Debentures are debt instruments with fixed interest, no voting rights, and tax-deductible interest payments.
  14. Commercial banks provide short to medium-term funds but require security and impose restrictive conditions.
  15. Financial institutions like development banks provide long-term funds, technical advice, and enhance goodwill.
  16. GDRs and ADRs are depository receipts issued abroad to raise foreign currency; ADRs are for the US market only.
  17. FCCBs are convertible bonds that can be turned into equity shares after a specified period.
  18. The choice of source of finance depends on cost, risk, control, period, purpose, and financial stability of the firm.

MCQs — 10 Questions with Answers

Q1. Which of the following is NOT a component of working capital requirements?

  • A. Purchase of raw materials
  • B. Payment of employee salaries
  • C. Purchase of plant and machinery ✓
  • D. Payment of rent and utilities

Answer: C — Plant and machinery are fixed assets requiring fixed capital, not working capital which is used for day-to-day operations.

Q2. A manufacturing company needs ₹50 lakhs immediately for purchasing new machinery. Which source of finance is MOST appropriate?

  • A. Trade credit from suppliers
  • B. Short-term bank loan
  • C. Long-term loan or issue of shares ✓
  • D. Seasonal working capital loan

Answer: C — Fixed assets like machinery require long-term finance exceeding 5 years, making long-term loans or shares appropriate, not short-term sources.

Q3. Why does a wholesale business typically require more working capital than a retail business?

  • A. Because it needs more fixed assets like land and building
  • B. Because a large portion of its assets are tied up in inventories and receivables ✓
  • C. Because it has higher employee salary costs
  • D. Because it operates in multiple locations

Answer: B — Wholesalers need larger working capital because they maintain huge inventories and extend credit to retailers, creating large receivables.

Q4. Which of the following statements is correct about the relationship between business type and fixed capital requirements?

  • A. Trading concerns need more fixed capital than manufacturing concerns
  • B. Both trading and manufacturing concerns need equal fixed capital
  • C. Manufacturing concerns typically require more fixed capital than trading concerns ✓
  • D. Fixed capital requirement is independent of business type

Answer: C — Manufacturing businesses invest heavily in plant and machinery, requiring significantly more fixed capital than trading concerns that mainly need inventory.

Q5. In the case of Mr. Anil Singh's restaurant expansion, which factor should MOST influence his choice of finance source?

  • A. The color and design of new restaurant buildings
  • B. The purpose of funds (expansion) and period for which funds are needed (long-term) ✓
  • C. The number of employees he currently has
  • D. The location of his existing restaurant

Answer: B — The purpose (long-term expansion requiring fixed assets) and period (more than 5 years) are critical factors determining appropriate finance sources.

Q6. A small business requires ₹2 lakhs for purchasing inventory and meeting payroll for the next 6 months. Identify the appropriate finance source.

  • A. Issue of shares to the public
  • B. Long-term bank loan of 7 years
  • C. Short-term trade credit or bank loan ✓
  • D. Debentures issued to financial institutions

Answer: C — Working capital for 6 months (less than 1 year) requires short-term sources like trade credit or short-term bank loans, not long-term instruments.

Q7. Which statement correctly describes the difference between fixed capital and working capital?

  • A. Fixed capital is for current expenses while working capital is for purchasing assets
  • B. Fixed capital is for purchasing long-term assets while working capital is for daily operations ✓
  • C. Both are used only for expansion purposes
  • D. Fixed capital has a shorter repayment period than working capital

Answer: B — Fixed capital funds the acquisition of permanent assets (land, machinery), while working capital funds day-to-day operational needs (materials, salaries).

Q8. A business selling goods primarily on credit will typically require: (i) less working capital than a cash-based business, (ii) more working capital because cash realization is delayed. Which statement is correct?

  • A. Only (i) is correct
  • B. Only (ii) is correct ✓
  • C. Both (i) and (ii) are correct
  • D. Neither (i) nor (ii) is correct

Answer: B — Credit-based businesses need more working capital because they must fund operations while waiting for customers to pay, creating a funding gap.

Q9. A company needs funds for: (i) Technology upgradation—which requires long-term finance, (ii) Purchasing seasonal inventory—which requires short-term finance. For which scenario(s) is this classification accurate?

  • A. Both (i) and (ii) are accurate ✓
  • B. Only (i) is accurate
  • C. Only (ii) is accurate
  • D. Neither (i) nor (ii) is accurate

Answer: A — Technology upgradation benefits the business long-term requiring extended financing periods, while seasonal inventory is a temporary need requiring short-term funds.

Q10. Mr. Singh is deciding between: Option A—Partnership (shared control but more funds), Option B—Bank loan (retains full control but must repay with interest). Which factors should primarily influence his decision? (Select all that apply and choose the most comprehensive answer)

  • A. Only the amount of funds available from partnership
  • B. Only his capacity to repay bank loan with interest
  • C. His preference for control, repayment capacity, risk tolerance, and the amount of funds needed for expansion ✓
  • D. Only his desire to maintain complete business control

Answer: C — The choice depends on multiple interconnected factors: desire for control (equity vs debt), financial capacity to repay loans, risk tolerance, and funds required for the expansion purpose.

Flashcards

What is business finance and why is it called the lifeblood of business?

Business finance is money required by a business to carry out its activities, and it's called lifeblood because no business can function without adequate funds.

Define fixed capital requirements with one example.

Fixed capital is funds needed to purchase fixed assets like land, building, plant, and machinery that remain invested in the business for a long period.

What is working capital and give one example of its use.

Working capital is funds needed for day-to-day operations such as purchasing raw materials, paying salaries, paying rent, and holding inventory.

On what three bases can sources of business finance be classified?

Sources of business finance can be classified on the basis of: (1) period (long-term, medium-term, short-term), (2) ownership (owner's funds, borrowed funds), and (3) source of generation (internal, external).

What are long-term sources of finance and when are they used?

Long-term sources fulfill financial requirements for a period exceeding 5 years and include shares, debentures, and long-term loans used mainly for acquiring fixed assets.

Distinguish between medium-term and short-term sources of finance.

Medium-term sources provide funds for 1-5 years (like bank borrowings), while short-term sources provide funds for less than 1 year (like trade credit).

Which type of business typically needs higher working capital and why?

Businesses selling goods on credit or with slow sales turnover need higher working capital because they need funds to cover the time gap until cash is received.

Why does a manufacturing concern need more fixed capital than a trading concern?

Manufacturing concerns require more fixed capital because they need to invest heavily in plant, machinery, and equipment, whereas trading concerns mainly need funds for inventory.

What is the main advantage of owner's funds compared to borrowed funds?

Owner's funds involve no obligation to repay and no interest cost, though they limit expansion if personal savings are insufficient.

Name two situations when a business needs additional funds beyond initial capital.

A business needs additional funds during expansion, technology upgradation, building higher inventories for festive season, and shifting to a new location.

Important Board Questions

Define business finance and explain why it is necessary to classify sources of finance into different categories based on time period. [2 marks]

State definition of business finance (funds for business activities). Explain that different financial needs have different durations—fixed assets require long-term funds (>5 years), working capital needs vary, and seasonal needs require short-term funds (<1 year).

Explain with examples the difference between fixed capital requirements and working capital requirements of a business. Why does a wholesale trader need more working capital than a retail trader? [5 marks]

Fixed capital = funds for long-term assets (plant, machinery, land) with examples from manufacturing. Working capital = funds for daily operations (salary, rent, inventory) with trading examples. Wholesale traders extend credit and maintain huge inventories, creating larger receivables and inventory investment compared to retail traders who primarily deal in cash.

Analyze the case of Mr. Anil Singh's restaurant expansion. He is considering three options: (1) using personal funds and partnership, (2) taking a bank loan, (3) issuing shares and debentures (if he converts to company). Evaluate each option considering: the purpose and duration of funds needed, the degree of control, repayment obligations, and the amount of funds required. Which option would you recommend and why? [6 marks]

Expansion is a long-term need requiring fixed capital for new restaurants (use long-term sources). Option 1: Limited funds, shared control and profits. Option 2: Retains full control but creates debt obligation and interest burden. Option 3: Only available for company form, raises substantial funds without repayment burden but dilutes ownership. Recommend based on Mr. Singh's need for ₹50+ lakhs for multiple locations requiring long-term commitment—partnership balances capital and control, or bank loan if he has repayment capacity, or company structure if substantial external investment is needed.

Assertion-Reason Questions for Sources of Business Finance

Q1. Assertion (A):

Business finance is essential for acquiring both fixed assets and meeting day-to-day operational needs.

Reason (R):

Business requires funds for purchasing plant and machinery as well as for holding inventory and paying salaries.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains why business finance is essential for both purposes. The chapter covers both fixed capital requirements and working capital requirements as needs for business finance.

Q2. Assertion (A):

A trading concern requires less fixed capital than a manufacturing concern.

Reason (R):

Trading concerns purchase finished goods while manufacturing concerns need extensive plant and machinery for production.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both are true, and the reason correctly explains the assertion. The chapter explicitly states that trading concerns require smaller fixed capital amounts compared to manufacturing concerns due to differences in their operational nature.

Q3. Assertion (A):

Medium-term sources of finance are required for periods exceeding one year but less than five years.

Reason (R):

These sources include only commercial bank loans and exclude other borrowings.

Answer: C — A is true but R is false — The assertion is true according to the chapter's classification, but the reason is false because medium-term sources include not only commercial bank borrowings but also public deposits and lease financing.

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Case-Based Questions (CBQ) for Sources of Business Finance

Case Study:

Rajesh Kumar, an entrepreneur from Bangalore, decided to establish a small manufacturing unit for producing electrical components. He invested ₹10 lakhs from his personal savings for purchasing machinery, land, and building (fixed assets). However, he realized he needed an additional ₹2 lakhs for purchasing raw materials, paying workers' salaries, and other daily operational expenses. He approached a commercial bank for a loan and obtained ₹2 lakhs as short-term credit. Six months later, when his business flourished, he decided to expand by adding a new production line. This expansion required ₹5 lakhs for new machinery and ₹1 lakh for additional working capital. He decided to approach a financial institution for a 3-year loan.

Q1. The initial ₹10 lakhs invested by Rajesh Kumar in machinery, land, and building represents which type of capital requirement?

  • A. Working capital
  • B. Fixed capital ✓
  • C. Short-term capital
  • D. Trade credit

Answer: B

Q2. The ₹2 lakhs borrowed from the commercial bank for raw materials and salaries is classified as which type of finance based on the period?

  • A. Long-term finance
  • B. Medium-term finance
  • C. Short-term finance ✓
  • D. Permanent finance

Answer: C

Q3. For his expansion, the ₹5 lakhs needed for new machinery should ideally be financed through which type of source?

  • A. Trade credit from suppliers
  • B. Long-term or medium-term finance due to the nature of fixed assets ✓
  • C. Short-term bank overdraft
  • D. Personal savings only

Answer: B

Q4. Which factor guided Rajesh Kumar to approach a financial institution for a 3-year loan instead of requesting additional short-term credit?

  • A. The period of expansion plans matched the loan duration for acquiring fixed assets ✓
  • B. Short-term credit cannot be used for any expansion
  • C. The bank refused to provide short-term credit
  • D. 3-year loans are always cheaper than short-term credit

Answer: A

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