Overview of Sources of Business Finance

• Equity shares are ordinary shares that do not have any preferential rights in dividend payment or repayment of capital.
• Dividend on equity shares is paid only after preference shareholders and the rate of dividend is not fixed.
• Equity shareholders receive payment at the time of winding up after creditors and preference shareholders are paid.
• They are entitled to the residual profits of the company.
• Equity shareholders have voting rights in general meetings of the company.

• Retained profits refer to a part of net profit that is kept in the business for reinvestment instead of being distributed as dividend.
• It is also called ploughing back of profits or self-financing, as it is an internal source of finance.
• Retained earnings are mainly used for expansion, modernisation, and growth of the business.
• The amount of retained profit depends on factors such as net profit, dividend policy, and age of the company.
• Future plans of the company, such as expansion and development, also influence the level of retained earnings.

• Loans are an important source of finance obtained from financial institutions and commercial banks.
• Financial institutions mainly provide long-term loans, while commercial banks generally provide short-term loans.
• Interest on loans is payable at a fixed rate every year.
• The principal amount of the loan is repayable on maturity.
• Long-term (term) loans are used for fixed capital, while short-term loans are used to meet working capital needs.

• Public deposits are loans taken by non-banking companies from the public, including employees and shareholders.
• They are unsecured loans given for a fixed period, usually from one to five years.
• Depositors receive a higher rate of interest compared to bank deposits.
• Companies prefer public deposits as they are cheaper than bank loans and do not require pledging assets.
• Deposits may be cumulative (interest paid at maturity) or non-cumulative (interest paid yearly), and are mainly accepted by well-known companies.

• Trade credit is the credit given by one business firm to another during the sale and purchase of goods and services.
• It is an unsecured short-term credit, usually available for 15 days to three months.
• It allows the buyer to receive goods now and pay later, reducing immediate working capital needs.
• The amount and terms of trade credit depend on the buyer’s goodwill, financial strength, and business relations.
• Trade credit may be in the form of open account (no written promise) or bills payable (written promise to pay at a future date).

• A Global Depository Receipt (GDR) is a financial instrument issued in US dollars by a company to raise capital from foreign investors.
• GDRs are listed and traded on foreign stock exchanges, such as American or European exchanges.
• One GDR may represent one or more equity shares of the company.
• GDR holders can convert them into shares but generally do not have voting rights.
• GDRs are issued through a Domestic Custodian Bank and an Overseas Depository Bank to foreign investors.

According to David Halt, "Venture capital is the money obtained through private or public investment funds directed to high-risk and high-potential enterprises”.

• Venture capital refers to funds invested in high-risk and high-potential start-up enterprises.
• Venture capitalists provide seed capital, development finance, and expansion funds to growing businesses.
• Investment is usually made in equity shares of the start-up company.
• Venture capitalists closely monitor the business to protect their investment.
• They expect high capital gains in return for the high risk undertaken.

• Factoring is a financial service in which a specialised agency called a factor collects book debts and bills receivable on behalf of a business firm for a commission.
• It helps firms realise their credit sales quickly and reduces delays in receiving payments from customers.
• The three parties involved are the seller (client), the buyer (debtor), and the factor (agent).
• The factor collects payments from buyers and remits the amount to the seller after deducting commission.
• The factor also provides services like financing, credit risk management, sales ledger administration, and advisory support.