Chapter 8: Sources of Business Finance

Answer: Internal sources of finance are generated within the business, such as retained earnings and accelerated receivables collection, and provide the benefit of not incurring obligation to external creditors. External sources, like loans and debentures, provide larger amounts but often at higher costs and with obligations. Companies may prefer internal sources to maintain greater control and lower costs.

Answer: Understanding the different financial institutions allows a business to choose sources that align with its strategic goals and financial capacity. Each institution offers specific types of funds, conditions, and advice, making it essential to select one that supports the business’s long-term objectives, minimizes costs, and provides ancillary services like consultancy.

Answer: The Reserve Bank of India regulates commercial papers by ensuring that only firms with good credit ratings can issue them, thereby protecting investors and maintaining market stability. It oversees the maturity terms, issuance limits, and general regulatory framework to ensure transparency and security in short-term borrowing.

Answer: Issuing preference shares can dilute control since these shareholders have preferential rights over dividends but do not have voting rights, limiting their influence on management. They provide financial stability through steady capital infusion without the obligation of repayment like debt, but they require committed dividend payouts which can strain cash flow if not carefully managed.

Answer: International financing enables Indian businesses to access large funds at potentially lower costs by tapping into global markets. It offers opportunities for growth, diversification, and enhanced competitiveness. It also involves currency and economic risks, making it crucial for companies to develop robust financial strategies to mitigate these challenges.