NCERT Solutions For Class 11 Business Studies Chapter 8 Sources Of Business Finance - 2025-26

1. What is business finance? Why do businesses need funds? Explain
Ans: Business finance refers to the money needed to run a business. It is essential because businesses require funds mainly for three things: to buy assets (like land or machinery), to manage day-to-day operations, and to support growth and expansion plans.

2. List sources of raising long-term and short-term finance.
Ans:
Long-term financial resources are:

• Equity Shares
• Preference Shares
• Retained Earnings
• Debentures
• Loans from financial institutions
• Loans from Banks

Short-term financing sources are:

• Trade credit
• Bank credit
• Factoring
• Public deposits
• Commercial Papers

3. What is the difference between internal and external sources of raising funds? Explain.
Ans:
Summary: Internal sources come from within the business, while external sources are from outside the business. Here is a comparison:

S.No.	Basis of Comparison	Internal Source	External Source
1	Meaning	Funds generated from within the organization	Funds generated from outside the organization
2	Needs	Only short-term or limited needs can be met	Large money requirements can be met
3	Security	No security required	Security required as collateral
4	Cost	Less expensive	Usually more expensive
5	Examples	Ploughing back profit, selling surplus inventory, etc.	Bank borrowings, public deposits, issuing debentures

4. What preferential rights are enjoyed by preference shareholders. Explain.
Ans: Preference shareholders have special rights, they get dividends at a fixed rate first, before equity shareholders. If the company shuts down, they are paid back before equity shareholders. They may get extra profits after equity shareholders. They have priority in refund if the company dissolves.


5. Name any three special financial institutions and state their objectives.
Ans: Three special financial institutions are:

• Unit Trust of India (UTI): Set up to collect savings from people and invest in profitable businesses.
• Industrial Finance Corporation of India (IFCI): Helps regional development and encourages new entrepreneurs, also supports management education.
• State Financial Corporation (SFC): Offers medium and long-term finance, especially for firms not covered by IFCI, including private and public limited companies, and partnerships.

6. What is the difference between GDR and ADR? Explain.
Ans:
Summary: GDR and ADR are financial instruments for raising capital in international markets, but they differ by where they are traded and who can invest in them.

Basis	GDR	ADR
Meaning	Negotiable instrument traded in foreign capital markets	Instrument traded in American markets (like a normal stock)
Stands for	Global Depository Receipt	American Depository Receipt
Issued by	Issued by Indian companies for foreign investors	Issued by American companies, only for Americans
Traded on	Foreign stock exchanges	Only on US stock exchanges

7. Explain trade credit and bank credit as sources of short-term finance for business enterprises.
Ans:
Summary: Trade credit and bank credit both help businesses meet short-term financial needs, but work differently.

• Trade Credit: Credit extended by one trader to another for the purchase of goods/services; payment is delayed. Useful especially for routine purchases and is based on past dealings and industry practices.
• Merits of Trade Credit:
  • Convenient and continuous source if the seller trusts the buyer.
  • No charge on business assets.
  • Helps to increase stock if sales grow.
• Limitations of Trade Credit:
  • Can lead to over-trading.
  • Usually covers limited needs.
  • Can be costlier than some other sources.
• Bank Credit: A loan provided by banks secured by assets of the business, with interest rates set by the current financial market.
• Advantages of Bank Credit:
  • Flexible borrowing and repayment as per needs.
  • Quicker access to funds compared to long-term sources.
  • Maintains secrecy of the firm's business.
• Disadvantages of Bank Credit:
  • Usually available only for short periods.
  • May be difficult and uncertain to renew.
  • Borrower often must keep assets as security.
  • Banks may place strict conditions or control over business assets.

8. Discuss the sources from which a large industrial enterprise can raise capital for financing modernization and expansion.
Ans:
To finance modernization and expansion, big companies can use several long-term funding options such as:

• Equity Shares: Selling ownership shares to investors.
• Preference Shares: Raising capital with fixed dividends and less risk for investors.
• Debentures: Borrowing money from the public with a promise to pay interest and return principal at maturity.
• Loans from Financial Institutions (like IDBI, IFCI): Taking loans for large, long-term requirements.
• Retained Earnings: Using profits kept back in the business instead of giving as dividends.
• Public Deposits: Collecting money from the public for a specific period.
• Foreign sources: Issuing ADRs, GDRs, or borrowing international funds.

9. What advantages does the issue of debentures provide over the issue of equity shares?
Ans:
Issuing debentures offers cost benefits and maintains ownership, but also creates some fixed obligations. Debentures do not give voting rights; ownership remains with shareholders. Interest paid on debentures is deducted from taxable income, reducing tax payments. Companies pay a fixed interest, so profits go to shareholders after interest payments. Suitable for companies with steady earnings, as interest must be paid every year.


10. State the merits and demerits of public deposits and retained earnings as methods of business finance.
Ans:
Public deposits and retained earnings both offer advantages and face some limits. Here are the main points:

• Public Deposits:
  • Merits:
    • Simple procedure with few restrictions.
    • Low cost compared to bank loans.
    • No dilution of control since depositors have no voting rights.
  • Demerits:
    • Not reliable as public response can change.
    • Hard for new companies to use due to less trust.
    • The amount raised is limited by legal rules.
• Retained Earnings:
  • Merits:
    • No extra costs like interest or flotation fees.
    • Makes company stronger financially and safer during tough times.
    • No share of control is lost by using retained earnings.
  • Demerits:
    • Profit amounts can change yearly, so retained earnings are not always steady.
    • If companies keep too much profit, shareholders may be unhappy if dividends are low.
    • Funds may sometimes be wasted if not managed well.

11. Discuss the financial instruments used in international financing.
Ans:
International financing uses special instruments for companies to raise money from abroad.

• Global Depository Receipts (GDRs): Receipts issued by depository banks, representing shares of a company in foreign markets (not USA). GDRs are denominated mostly in US dollars.
• American Depository Receipts (ADRs): Receipts issued only for the American market and can be traded on US stock exchanges. Available only to US citizens.
• Foreign Currency Convertible Bonds (FCCBs): Debt instruments that can be converted into company shares or depository receipts after a set time.

12. What is commercial paper? What are its advantages and limitations?
Ans:
Commercial paper is an unsecured, short-term promissory note used by big companies to raise funds for 7 days to 1 year. It offers some unique benefits but is not suited for every business.

• Issued only by companies with high credit ratings.
• Regulated by the Reserve Bank of India.

Advantages:

• No strict restrictions compared to bank loans.
• Large sums can be raised quickly.
• Usually cheaper than borrowing from banks.
• Repayment period can match company needs.
• Spare cash can be invested for good returns.

Limitations:

• Only companies with strong finances can issue commercial paper.
• The amount that can be raised is limited.
• The maturity period cannot be extended easily if a company faces financial trouble.

13. Collect information about the companies that have issued debentures in recent years. Give suggestions to make debentures more popular.
Ans: Companies like Muthoot Finances, Reliance Capital, Shriram Transport Finances, and Tata Global Beverages have issued debentures recently. To make debentures more popular:

• Offer them with higher interest rates to attract more investors.
• Allow debentures to be easily converted into equity shares at maturity.

14. Institutional financing has gained importance in recent years. In a scrapbook paste detailed information about various financial institutions that provide financial assistance to Indian companies.
Ans:
Summary: Many institutions provide finance for Indian businesses, especially for large projects and industrial development.

• Industrial Finance Corporation of India (IFCI): Offers medium and long-term finance, underwrites shares, and guarantees loans.
• Industrial Credit and Investment Corporation of India (ICICI): Helps the private sector, especially small and medium businesses.
• State Financial Corporations (SFCs): Run by state governments to provide finance mainly to small and medium businesses in each state.
• Industrial Development Bank of India (IDBI): Coordinates the work of other financial institutions and gives direct financial support to bridge gaps in supply and demand for funds.

15. On the basis of the sources discussed in the chapter, suggest suitable options to solve the financial problem of the restaurant owner.
Ans: A restaurant owner can use different sources to solve financial issues depending on their needs. Use bank credit or a business line of credit for regular expenses or covering shortfalls. Equipment financing to buy ovens, stoves, or refrigerators. Apply for loans from banks or financial institutions for bigger investments or expansion. Consider merchant cash advances for funds based on future sales. Look for crowdfunding or angel investors if the business is new or growing fast.


16. Prepare a comparative chart of all the sources of finance.
Ans:
Summary: Businesses need money for long-term, medium-term, and short-term purposes using different sources, each with its pros and cons.

• Long-term needs: Such as buying fixed assets, plant and machinery, land, and buildings.
• Short-term/Working capital needs: For daily operations like salaries, rent, and raw materials.
• Main sources:
  • Equity shares – owners with voting rights, higher returns if profits are high
  • Preference shares – fixed dividends, priority on assets
  • Debentures – long-term borrowing, fixed returns, no ownership rights
  • Retained earnings – profit kept aside for future use
  • Loans from banks/financial institutions
  • Trade credit, factoring, public deposits, commercial papers

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Quick Points from NCERT Solution Class 11 Business Studies Chapter 8: Sources Of Business Finance

• Business finance is vital for running, expanding, and managing any business.
• Sources Of Business Finance Class 11 NCERT Solutions cover both internal and external sources.
• Key sources include equity, preference shares, debentures, retained earnings, trade and bank credit.
• Students learn the advantages and limitations of each finance source through questions and answers.
• This chapter also explains international finance tools like GDRs and ADRs.