Question

Discuss finance for different types of business firms.

Explain the finance for different types of business firms.

Answer 1

The term ‘capital’ refers to the funds invested in a business with the aim of generating profits. In business, capital is essential for both the production and distribution of goods and services. The amount of capital needed varies depending on the type and size of the business. The capital requirements and the sources from which businesses raise their funds are explained below:

1. Capital for Sole Proprietorship Business: A sole proprietor runs a small-scale business and generally requires a limited amount of capital. The proprietor contributes personal funds as the main source of capital. In a sole proprietorship, the owner’s capital includes the initial investment and profits retained in the business, which are added to the capital account at the end of each financial year. Besides using personal funds, the proprietor can borrow money from friends and family or seek loans from banks and financial institutions. For short-term needs like working capital, commercial banks may provide loans. For long-term needs such as purchasing fixed assets, loans can be availed from State Financial Corporations and other financial institutions. The government, both at the central and state levels, also offers special financial support to promote small businesses and entrepreneurship. Additionally, the proprietor may purchase raw materials and finished goods on credit, although this facility is typically limited to a short duration.
2. Capital for Partnership Firm: A partnership firm typically requires a larger amount of capital compared to a sole proprietorship. The capital in a partnership is contributed by the partners, usually in a mutually agreed ratio. Additionally, profits retained in the business are also credited to the partners' capital accounts and form part of the firm’s owned capital. Apart from partners' contributions, the firm can obtain loans from commercial banks and financial institutions. In some cases, partners may also provide loans to the firm. For acquiring machinery and equipment, the firm can opt for instalment or hire purchase methods. Furthermore, the firm may secure short-term credit from suppliers for purchasing raw materials and finished goods.
3. Capital for Joint Stock Company: A joint stock company usually requires a substantial amount of capital. A public company can raise significant funds by issuing shares to the public. Besides share capital, the company can also make use of retained profits, which are kept as reserves. Additionally, it can borrow funds by issuing debentures or taking loans. Long-term loans are typically obtained from financial institutions, while short-term loans can be availed from commercial banks.