Class 11 Business Studies Chapter 8 NCERT Solutions 2026-27

Concept used. Business finance means the funds required by a business to carry out its activities. It is needed from the start of the business and continues through daily operations and expansion.

Business finance is the money required to establish, run and expand a business. Businesses need funds for fixed assets, working capital, growth, technology improvement and meeting current obligations.

1. Meaning: Business finance is the requirement of funds by business to carry out production, distribution and other business activities.
2. Starting the business: A business needs money to buy fixed assets such as land, building, machinery, furniture and fixtures.
3. Running daily operations: Funds are also needed for raw materials, salaries, wages, rent, taxes, stock and bills receivable.
4. Fixed capital need: Money invested in fixed assets stays in the business for a long period.
5. Working capital need: Money used for day-to-day operations keeps the business cycle moving.
6. Growth need: When the business expands, shifts location or upgrades technology, it needs additional finance.
7. Seasonal need: A business may also need larger inventories before a festival season or a period of expected high demand.

Business finance means the funds required to establish, operate and expand a business. Businesses need funds for fixed capital, working capital, growth, technology upgradation, inventories and payment of current expenses.

Concept used. Sources of finance can be classified on the basis of time. Long-term sources meet needs for more than five years, while short-term sources meet needs for a period not exceeding one year.

Long-term finance may be raised through shares, debentures, retained earnings, long-term loans from financial institutions and international sources. Short-term finance may be raised through trade credit, commercial bank credit, factoring and commercial paper.

1. Long-term finance is used when funds are required for more than five years.
2. Important long-term sources are equity shares, preference shares, debentures, retained earnings and loans from financial institutions.
3. A company may also use international sources such as Global Depository Receipts, American Depository Receipts and Foreign Currency Convertible Bonds.
4. Long-term finance is useful for fixed assets, modernisation and expansion.
5. Short-term finance is used when funds are required for not more than one year.
6. Important short-term sources are trade credit, commercial bank credit, factoring, commercial paper and bill discounting.
7. Short-term finance is mainly used for stock, accounts receivable and other current assets.

Long-term sources include shares, debentures, retained earnings, financial-institution loans and international finance. Short-term sources include trade credit, bank credit, factoring, commercial paper and bill discounting.

Concept used. On the source-of-generation basis, finance may come from inside the business or from outside the business. Internal sources are generated within the business, while external sources are raised from outsiders.

Internal sources include retained earnings, faster collection of receivables and sale of surplus inventory. External sources include suppliers, lenders, investors, banks, financial institutions, public deposits, shares and debentures.

1. Internal sources are generated from within the business itself.
2. Examples are retained earnings, collection of receivables, sale of surplus inventory and ploughing back of profits.
3. They usually involve lower explicit cost because no outside lender or investor is approached.
4. They also give more operational freedom because the business does not have to accept outside conditions.
5. However, internal sources can meet only limited financial needs because they depend on profits and assets already inside the business.
6. External sources are raised from outside the business.
7. Examples are trade credit, bank loans, financial institution loans, public deposits, issue of shares and issue of debentures.
8. External sources can raise large amounts, but they may involve interest, dividend expectations, security, paperwork or control issues.

Internal sources are funds generated inside the business, such as retained earnings and faster collection of receivables. External sources are funds raised from outsiders, such as suppliers, banks, investors, public depositors and financial institutions.

Concept used. Preference shareholders are shareholders who enjoy a preferential claim over equity shareholders in dividend and repayment of capital. They combine features of ownership capital and fixed-return investment.

Preference shareholders get dividend at a fixed rate before equity shareholders. At liquidation, they get capital repayment after creditors are paid but before equity shareholders receive capital.

1. Preference share capital is the capital raised by issuing preference shares.
2. Preference shareholders receive dividend at a fixed rate out of net profits.
3. This dividend is paid before any dividend is declared for equity shareholders.
4. Preference shareholders also enjoy priority in repayment of capital.
5. At the time of liquidation, creditors are settled first.
6. After creditors are paid, preference shareholders receive capital before equity shareholders.
7. Generally, preference shareholders do not enjoy voting rights, so control usually remains with equity shareholders.

Preference shareholders enjoy two main preferential rights: fixed dividend before equity shareholders and repayment of capital before equity shareholders at liquidation, after creditors have been paid.

Concept used. Special financial institutions are development banks or institutions set up to provide long-term and medium-term finance. They also support industrial development through advice, surveys and technical help.

Three examples are IFCI, IDBI and SIDBI. IFCI provides industrial finance, IDBI supports and coordinates industrial development finance, and SIDBI promotes and finances small-scale industries.

1. IFCI, Industrial Finance Corporation of India: It was set up to provide medium and long-term finance to industrial concerns.
2. Its objective is to help industries meet needs such as expansion, modernisation and reorganisation.
3. IDBI, Industrial Development Bank of India: It was created to promote and assist industrial development.
4. Its objective is to coordinate and strengthen industrial finance and provide development support.
5. SIDBI, Small Industries Development Bank of India: It focuses on micro, small and medium enterprises.
6. Its objective is to promote, finance and develop small business units.
7. Such institutions supplement commercial banks and are useful when large funds are needed for a longer period.

Any three special financial institutions are IFCI, IDBI and SIDBI. IFCI provides industrial finance, IDBI promotes and coordinates industrial development finance, and SIDBI promotes and finances small industries.

Concept used. Depository receipts help a company raise funds in foreign markets. They represent shares deposited with a depository bank and are traded as negotiable instruments.

GDR means Global Depository Receipt and can be listed and traded on foreign stock exchanges outside the home country. ADR means American Depository Receipt and is issued in the USA for trading in American markets.

1. In a GDR, local currency shares are delivered to a depository bank.
2. The depository bank issues receipts against those shares.
3. GDRs are usually denominated in US dollars and are traded freely on foreign stock exchanges.
4. An Indian company can issue GDRs abroad to raise funds in foreign currency.
5. ADRs are depository receipts issued by a company in the United States of America.
6. ADRs are bought and sold in American markets like regular stocks.
7. The main difference is place and market: GDR is a global foreign-market instrument, while ADR is limited to the USA market.

A GDR is a depository receipt issued abroad and traded on foreign stock exchanges. An ADR is a depository receipt issued in the USA and traded in American markets.

Concept used. Short-term finance meets business needs for a period not exceeding one year. Trade credit and bank credit are common sources for financing current assets such as stock, receivables and operating expenses.

Trade credit is supplier credit for purchase of goods and services without immediate payment. Bank credit is short or medium-term finance from commercial banks through cash credit, overdraft, loans, bill discounting and letters of credit.

1. Trade credit: It is credit extended by one trader to another for the purchase of goods and services.
2. It allows a buyer to purchase supplies now and pay later.
3. In the buyer's books, it appears as sundry creditors or accounts payable.
4. Trade credit is granted when the buyer has financial standing, goodwill and a good payment record.
5. Its period and volume depend on the buyer's reputation, seller's position, purchase volume, past payment record and market competition.
6. Merits of trade credit: It is convenient, continuous, readily available for known customers and does not create a charge on assets.
7. It also helps the seller promote sales and helps the buyer build inventory for expected demand.
8. Limitations of trade credit: It can encourage overtrading, raises only limited funds and may be costly compared with many other sources.
9. Bank credit: Commercial banks provide funds to firms of all sizes for different purposes and time periods.
10. Banks provide cash credit, overdraft, term loans, purchase or discounting of bills and letters of credit.
11. The interest rate depends on the borrowing firm and general interest rates in the economy.
12. Merits of bank credit: It gives timely assistance, maintains secrecy, avoids prospectus formalities and offers flexibility.
13. Limitations of bank credit: It is usually for short periods, renewal may be uncertain, security may be needed and banks may impose difficult conditions.

Trade credit and bank credit are important short-term sources. Trade credit comes from suppliers and supports purchases without immediate payment. Bank credit comes from commercial banks through cash credit, overdraft, loans, bill discounting and letters of credit.

Concept used. Modernisation and expansion usually need large funds for a long period. A large industrial enterprise should use a mix of owner's funds, borrowed funds, institutional finance and international finance.

A large industrial enterprise may raise long-term capital through equity shares, preference shares, debentures, retained earnings, financial institutions, lease financing and international sources such as GDRs, ADRs and FCCBs. Public deposits and bank loans may support short or medium-term parts of the plan.

1. Equity shares: They provide permanent ownership capital and do not create a fixed repayment burden.
2. Equity suits expansion when the company can share ownership and voting rights with more shareholders.
3. Preference shares: They provide finance with a fixed rate of dividend and lower control dilution than equity.
4. Debentures: They provide long-term debt capital at a fixed rate of interest.
5. Debentures suit companies with stable sales and earnings because interest must be paid regularly.
6. Retained earnings: These are profits kept in the business and used for growth.
7. They give internal finance without issue cost, interest or direct outside conditions.
8. Public deposits: A company may invite deposits from the public for short and medium-term parts of the plan.
9. This source can support expansion, but it should not be treated as the main long-term source for a very large project.
10. Commercial banks: Banks may provide loans, cash credit, overdraft, bill discounting and letters of credit.
11. Bank finance is useful for specific or working-capital needs, but it may require security and investigation.
12. Financial institutions: Development banks provide long and medium-term finance for expansion, reorganisation and modernisation.
13. They may also provide technical, managerial and financial advice.
14. Lease financing: It helps an enterprise use assets such as computers or equipment without buying them outright.
15. International finance: A large enterprise may raise foreign currency funds through GDRs, ADRs, FCCBs, foreign commercial banks and international development banks.

For modernisation and expansion, a large industrial enterprise should mainly use long-term sources such as equity shares, preference shares, debentures, retained earnings, financial institutions, lease financing and international sources such as GDRs, ADRs and FCCBs. Public deposits and bank loans can support short or medium-term parts of the plan.

Concept used. Debentures are borrowed funds, while equity shares are owner's funds. A debenture holder is a creditor of the company, but an equity shareholder is an owner with voting rights.

Debentures do not dilute ownership control, have a fixed interest cost, are usually less costly than equity, give tax benefit because interest is deductible, and do not require sharing profits with debenture holders.

1. No control dilution: Debenture holders do not get voting rights.
2. Therefore, issuing debentures does not dilute the control of equity shareholders.
3. No profit sharing: Debenture holders receive fixed interest.
4. They do not participate in the profits of the company.
5. Lower cost: Financing through debentures is generally less costly than preference or equity capital.
6. Tax benefit: Interest paid on debentures is treated as an expense and is tax deductible.
7. Suitable for stable firms: If sales and earnings are stable, a company can carry the fixed interest burden.
8. Attractive to cautious investors: Debentures are preferred by investors who want fixed income at lesser risk.
9. Ownership remains unchanged: Existing shareholders keep ownership claims because debenture holders are creditors.

Debentures are advantageous over equity shares because they do not dilute control, do not share profits, usually cost less, provide tax benefit on interest and suit companies with stable earnings.

Concept used. Public deposits are funds raised directly from the public, while retained earnings are profits kept in the business. Public deposits are external borrowed funds, but retained earnings are internal owner-related funds.

Public deposits are simple, cheaper than many borrowings and do not usually create a charge on assets, but they may be unreliable and difficult for new companies. Retained earnings are permanent, internally generated and flexible, but they depend on profits and may reduce shareholder dividends.

1. Public deposits, meaning: These are deposits raised by organisations directly from the public.
2. Merit 1: The procedure is simple and normally has fewer restrictive conditions than loan agreements.
3. Merit 2: The cost is generally lower than borrowing from banks and financial institutions.
4. Merit 3: Public deposits do not usually create a charge on company assets.
5. Merit 4: Depositors do not have voting rights, so company control is not diluted.
6. Demerit 1: New companies may find it difficult to raise funds through public deposits.
7. Demerit 2: It is unreliable because the public may not respond when money is needed.
8. Demerit 3: Collection may become difficult when the required deposit amount is large.
9. Retained earnings, meaning: These are the part of net earnings kept in the business instead of being distributed as dividends.
10. Merit 1: Retained earnings are a permanent source of funds.
11. Merit 2: They do not involve explicit interest, dividend or floatation cost.
12. Merit 3: They give operational freedom and help the business absorb unexpected losses.
13. Merit 4: They may increase the market price of equity shares.
14. Demerit 1: Excessive ploughing back may dissatisfy shareholders because dividends become lower.
15. Demerit 2: It is uncertain because business profits fluctuate.
16. Demerit 3: Many firms ignore the opportunity cost of retained funds, which may lead to poor use of money.

Public deposits are simple and cheaper but may be unreliable and difficult for new companies. Retained earnings are permanent and flexible internal funds, but they are uncertain and may dissatisfy shareholders if dividends fall.