Sources of Business Finance

• (a) Return: Owner's funds receive Dividends (fluctuating, paid only out of profits); Borrowed funds receive Interest (fixed rate, paid regardless of profits).
• (b) Tax Treatment: Dividends on owner's funds are an appropriation of profit and NOT tax-deductible; Interest paid on borrowed debt is a tax-deductible expense, reducing corporate tax liabilities.
• (c) Control: Owner's funds (equity) carry full voting rights and control; Borrowed funds carry zero voting rights.
• (d) Security: Owner's funds create no charge on assets; Borrowed funds (loans, debentures) typically require mortgage charges on physical assets.

• ADR (American Depository Receipt): A dollar-denominated depository receipt issued by a US depository bank representing shares in a foreign company. ADRs can be sold and traded strictly on American Stock Exchanges (NYSE, NASDAQ) and must satisfy strict US Securities and Exchange Commission (SEC) regulatory disclosures.
• GDR (Global Depository Receipt): A depository receipt issued by an international bank representing foreign shares that can be traded on stock exchanges outside the United States (most commonly on the London Stock Exchange or Luxembourg Stock Exchange).

Factoring is a modern financial service where a business firm sells its accounts receivable (invoices/debtors) at a discount to a specialized financial intermediary called a Factor, receiving immediate cash (typically 75% to 80% upfront) and avoiding debt collection delays.
• Recourse Factoring: If a customer defaults and becomes a bad debt, the client firm bears the loss and must compensate the factor.
• Non-Recourse Factoring: The factor assumes all credit risk! If a customer defaults, the factor absorbs the bad debt loss completely and cannot demand repayment from the client firm.

Ploughing back of profits (Retained Earnings) is an internal source of business finance where an enterprise retains a portion of its annual net profits in general reserves instead of distributing it as dividends, reinvesting the funds back into business expansion.
• Advantages:
1. Zero Flotation Cost: Involves zero underwriting commissions, legal fees, or prospectus printing expenses.
2. No Dilution of Control: Raises expansion capital without issuing new voting shares to outsiders.
• Limitation: Excessive profit retention can trigger dissatisfaction among equity shareholders who expect regular, healthy cash dividends.

Commercial Paper (CP) is an unsecured, short-term money market negotiable promissory note issued by highly rated corporate entities to raise short-term working capital (bridge financing) at lower interest rates than commercial banks.
• Maturity Period: Typically ranges from 7 days up to 1 year.
• Eligible Companies: Only corporate giants with impeccable credit ratings (AAA or A1+ ratings from agencies like CRISIL/ICRA) and strong balance sheets can issue CP, as it is completely unsecured.

• Fixed Capital: Capital invested in long-term, non-current physical assets that remain locked in the business for multiple years to facilitate production. Examples: Land & Buildings, Factory Plant & Machinery.
• Working Capital: Capital invested in short-term current assets required to finance day-to-day operational business activities and maintain liquidity. Examples: Cash in hand, Trade Debtors, Raw Material Inventory.

Public deposits are attractive because:
1. Lower Cost: The interest rate paid on public deposits is typically lower than commercial bank borrowing rates.
2. No Charge on Assets: Public deposits are completely unsecured, leaving company fixed assets free and unencumbered for future mortgage borrowing.
3. Zero Management Interference: Depositors are unsecured creditors with zero voting rights, preserving management control.