Sources of Business Finance - Solutions

 CBSE Class 11 Business Studies

NCERT Solutions
Sources of Business Finance


1. What is business finance? Why do businesses need funds? Explain.

Ans. Business is concerned with the production and distribution of goods and services for the satisfaction of needs for the society. For carrying out various activities, business requires money. Finance therefore is called the life blood of any business. The requirement of funds by a business to carry out its various activities is called business finance.

A business needs funds for the purchase of plant and machinery, furniture and other fixed assets. Similarly some funds are needed for day to day operations, say to purchase raw materials, pay salaries to employees etc.

2. List sources of raising long-term and short term finance.

Ans. Sources of raising long term and short term finance are shown in the chart given below:

3. What is the difference between internal and external sources of raising funds? Explain.

Ans. The differences between internal and external sources of raising funds are summarised in the table given as follows:

Internal Sources
External Sources


Internal sources of capital are those sources that are generated within the business.

External sources of raising funds are those which are outside the business.


Ploughing back of profits, equity shares

Financial institutions, loans from banks, preference shares, debentures, public deposits, lease financing, commercial papers, trade credit, factoring


It is more reliable.

It is less reliable.

4. What preferential rights are enjoyed by preference shareholders? Explain.

Ans. Following preferential rights are enjoyed by the preference shareholders:

(a) They get dividend at a fixed rate and dividend is given on these shares before any dividend on equity shares.

(b) When company winds up, preference shares are paid before equity shares.

(c) Preference shares also have a right to participate in excess profits left after payment being made to equity shares.

(d) They also have a right to participate in the premium at the time of redemption.

In lieu of these preferential rights, their voting rights are taken i.e. they are not eligible for voting.

5. Name any three special financial institutions and state their objectives.

Ans. The three special financial institutions are as following:

1. Industrial Finance Corporation of India (IFCI): Its objective include promoting balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the country.

2. Unit Trust of India (UTI): The basic objective of UTI is to mobilize the community’s savings and channelise them into productive ventures.

3. Industrial Development Bank of India (IDBI): It was established in 1964 with an objective to co-ordinate the activities of other financial institutions, including commercial banks.

6. What is the difference between GDR and ADR? Explain.

Ans. The local currency shares of a company are delivered to the depository bank. The depository bank issues depository receipts against these shares. Such depository receipts denominated in US dollars are known as Global Depository Receipts (GDR).

The depository receipts issued by a company in the US are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stock.