Sources of Business Finance: ISC Class 12 Business Studies Notes

What Sources of Business Finance is about

Weightage: CISCE publishes no unit or chapter weightage for ISC Business Studies: the 80-mark paper (Sections A, B and C) can draw on any part of the Class XII syllabus.Source: CISCE ISC Business Studies syllabus, examination year 2027

Key concepts

Owned funds: equity shares, preference shares, retained profits

Equity shares represent ownership of a company. Equity shareholders have voting rights, receive a dividend that varies with profits (paid only after preference dividend) and are paid last on winding up. They bear the highest risk and get the residual profits. For the company: permanent capital, no fixed burden (no compulsory dividend), no charge on assets; but dilutes control and is costlier to issue.

Preference shares carry two preferences over equity shares: a fixed rate of dividend paid before equity dividend, and return of capital before equity shareholders on winding up. They normally have no voting rights (except on matters affecting them). Types: cumulative/non-cumulative, participating/non-participating, convertible/non-convertible, and redeemable (under the Companies Act, 2013, a company may issue only preference shares redeemable within 20 years, so irredeemable ones can no longer be issued). They suit cautious investors seeking steady dividends.

Retained profits (ploughing back of profits): the part of net profit kept in the business instead of being distributed as dividend; an internal source of owned funds. Merits: no cost of issue, no interest, no dilution of control, builds financial strength. Limitations: shareholders may be unhappy with lower dividends; available only to profitable firms; amount uncertain.

Worked example

Suppose a retired couple wants to invest in a company's shares but needs a fixed, regular dividend and priority over other shareholders. Which kind of shares should they buy? Give a reason. [1 mark]

Try it first, then show the solutionSolution

1. They carry a fixed rate of dividend paid before equity dividend.

Answer: Preference shares.

Borrowed funds: debentures and bonds, public deposits, loans

Debentures are instruments acknowledging a debt raised by a company from the public; debenture holders are creditors, not owners. They receive interest at a fixed rate (whether or not there are profits), are usually secured by a charge on assets and are repaid after a fixed period. Bonds are similar debt instruments (the term is used especially by governments and public bodies). Merits: no dilution of control; interest is tax-deductible; suitable when earnings are stable. Limitations: fixed interest burden; assets are charged; risky when profits fall.

Public deposits: deposits raised by a company directly from the public (including shareholders and employees) at a rate higher than bank deposits, usually for 6 months to 3 years, under the Companies Act rules. Merits: simple, cheaper than bank loans, no charge on assets. Limitations: short-term; available only to well-known firms.

Loans: money borrowed from banks and financial institutions for a fixed period at an agreed rate of interest, usually against security (collateral), and repaid in instalments: term loans for fixed assets, cash credit and overdraft for working capital.

Worked example

Suppose a cement company borrows ₹50 crore from the public by issuing 9% instruments secured on its plant and repayable after seven years. Name the source and explain it. [2 marks]

Try it first, then show the solutionSolution

1. A debenture is an instrument acknowledging a loan taken by a company; debenture holders are creditors of the company.
2. They receive interest at a fixed rate, not dividend, and are repaid on maturity; debentures are usually secured on the company's assets.

Answer: Company borrowing from the public at fixed interest, repaid after a fixed period.

Short-term trade-based sources: trade credit, bill discounting, factoring

Trade credit: credit given by suppliers to a business for purchase of goods on credit without immediate payment; it is a source of finance without any cash changing hands, shown as creditors or bills payable. Merits: convenient, no interest if paid on time, grows with purchases. Limitations: losing cash discounts; overtrading risk.

Discounting of bills of exchange: a business holding a bill of exchange (accepted by its customer) can sell it to a bank before its due date; the bank pays the amount less a discount (interest for the remaining period) and collects the full amount on maturity. Example: a bill of ₹1,00,000 with 73 days to run, discounted at 12% a year: discount = 1,00,000 × 12% × 73/365 = ₹2,400; the firm gets ₹97,600 now.

Factoring: a financial service in which a business sells its trade receivables (book debts) to a factor (bank or factoring company), which pays an advance (often around 80%) at once, collects the debts and pays the balance less its fee. It also provides credit information and collection services. Example: receivables ₹5,00,000; advance at 80% = ₹4,00,000; fee at 2% = ₹10,000.

Worked example

Suppose a stationery shop receives notebooks from a wholesaler and is allowed to pay after 60 days. Name and explain this source of finance for the shop. [2 marks]

Try it first, then show the solutionSolution

1. Trade credit is the credit extended by suppliers when they sell goods on credit, allowing the buyer to pay later.
2. It finances working capital without any immediate cash or borrowing; it appears as creditors or bills payable.

Answer: Supplier credit on purchases: finance without immediate payment.

Global depository receipts (GDRs)

A global depository receipt (GDR) is a negotiable instrument issued abroad by an overseas depository bank against the shares of an Indian (domestic) company held with a custodian in India. GDRs are denominated in a foreign currency (usually US dollars) and listed and traded on foreign stock exchanges (such as Luxembourg or London).

Through GDRs, an Indian company raises foreign capital from international investors without listing its shares directly abroad. Holders get dividends (converted into foreign currency) but usually have no voting rights.

Merits: access to large international funds; global visibility; foreign exchange. Limitations: costly and complex; subject to foreign regulations; exchange-rate risk.

Worked example

Suppose an Indian IT company wants to raise US dollars from European investors without listing its shares on a European exchange. Which instrument can it use? [1 mark]

Try it first, then show the solutionSolution

1. A depository bank abroad issues dollar receipts against the company's shares; the receipts trade on foreign exchanges.

Answer: Global depository receipts (GDRs).

Start-up finance: angel investors and venture capitalists

Angel investors are wealthy individuals who invest their own money in very early-stage start-ups (often at idea or prototype stage), usually in exchange for equity (or convertible debt). Amounts are smaller; they often also give mentoring and contacts; decisions are personal and quick.

Venture capitalists (VCs) are professional investment firms (funds) that pool money from institutions and investors and invest larger amounts in high-risk, high-growth businesses, usually at a later stage (once the product and market are proven), in exchange for equity. They take an active role (board seats, strategy) and plan to exit (sell their stake) after some years with a large gain.

Basis	Angel investor	Venture capitalist
Who	Individual	Professional firm/fund
Whose money	Own	Pooled from investors
Stage	Very early (seed)	Later (growth)
Amount	Smaller	Larger
Involvement	Mentoring, informal	Formal control, board seats

Worked example

Distinguish between an angel investor and a venture capitalist on the basis of whose money is invested. [1 mark]

Try it first, then show the solutionSolution

1. Compare the source of funds.

Answer: An angel investor invests his own money; a venture capitalist invests funds pooled from other investors.

Crowd funding and peer-to-peer funding

Crowd funding: raising small amounts from a large number of people (the crowd), usually through an online platform, to fund a project, product or cause. Forms: donation-based, reward-based (backers get the product or a gift), debt-based and equity-based (subject to regulation). Merits: tests market interest, publicity, no collateral. Limitations: ideas may be copied; failure to reach the target; platform fees.

Peer-to-peer (P2P) funding (lending): individuals lend directly to individuals or small businesses through an online P2P platform that matches lenders and borrowers, without a bank as intermediary. Borrowers pay interest; lenders earn returns higher than bank deposits but bear the risk of default. (In India, P2P platforms are regulated by the RBI.) Merits: quick, less paperwork, access for small borrowers. Limitations: higher interest for risky borrowers; default risk for lenders.

Worked example

Suppose a young designer raises ₹8 lakh on an online platform from 1,200 backers, each of whom will receive the first copy of her board game. Name the source and its form. [1 mark]

Try it first, then show the solutionSolution

1. Many small contributions through an online platform, rewarded with the product.

Answer: Crowd funding (reward-based).

Sources of Business Finance in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Angel Investors, Venture Capital, Crowd Funding and Peer-to-Peer Funding
• Equity and Preference Shares, Debentures, Retained Profits, Deposits and Loans
• Trade Credit, Discounting of Bills, Factoring and GDR

Sources of Business Finance: key facts

Return on finance

1. 1.Shares
2. 2.dividend; debentures, bonds, deposits, loans
3. 3.interest

Bill discounting

Proceeds = face value − (face value × rate × days ÷ 365)

Factoring

Immediate advance (part of receivables) + balance on collection − factor's fee

Classification

Owned: equity, preference, retained profits; borrowed: debentures, deposits, loans, P2P; trade: credit, discounting, factoring

How the board asks Sources of Business Finance

The question patterns to expect, and the method that works for each.

Tricks to remember Sources of Business Finance

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Owners get D, lenders get I

  Dividend for shareholders; Interest for debenture holders and lenders.

  Use it when: Avoiding the commonest slip.

• Preference = Priority

  Preference shares have priority in dividend and capital repayment.

  Use it when: Preference shares.

Sources of Business Finance: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section C style)

Read the situation, then answer every part. In the board paper this is a 8-mark question split into 4 + 2 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Sources of Business Finance

The slips examiners see most often, and what to write instead.

• ✗Mistake: Dividend on debentures

  CISCE examiners' comments, 2024: candidates said dividend, instead of interest, is paid to debenture holders.

  ✓Do this: Debenture holders are creditors: they get interest.

  Usually costs: 1 mark.

• ✗Mistake: Angel investors and venture capitalists confused

  CISCE examiners' comments, 2024: candidates confused venture capitalists with angel investors.

  ✓Do this: Angel: individual, own money, very early stage. VC: professional fund, pooled money, growth stage.

  Usually costs: 1-2 marks.

• ✗Mistake: "Equity" or "preferential" for steady dividends

  CISCE examiners' comments, 2025: for shares suited to cautious investors seeking steady dividends, candidates wrote "equity", or "preferential" in place of "preference".

  ✓Do this: Write "preference shares".

  Usually costs: 1 mark.

• ✗Mistake: Personal loans in a business-finance answer

  CISCE examiners' comments, 2025: asked to explain loans, candidates described housing and car loans rather than business loans.

  ✓Do this: Business loans: term loans, cash credit, overdraft; interest, repayment schedule, collateral.

  Usually costs: 1-2 marks.

• ✗Mistake: Copying the passage in case questions

  CISCE examiners' comments, 2025: in a case on a childcare start-up named Guardian Angels, candidates copied lines from the passage and confused the firm with angel investors.

  ✓Do this: Answer the concept in your own words; read names carefully.

  Usually costs: 1-2 marks.

Practice questions on Sources of Business Finance

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Debenture holders receive:
   (a) dividend
   (b) interest
   (c) bonus
   (d) commission

   Hint

   Creditors.

   Answer

   (b)

2. Q2 · 1 mark · Very short answerBoard level

   What is ploughing back of profits?

   Hint

   Retained.

   Answer

   Keeping part of the profits in the business instead of distributing them as dividend.

3. Q3 · 1 mark · Very short answerHarder board level

   Give one difference between crowd funding and peer-to-peer funding.

   Hint

   Return.

   Answer

   Crowd funding often involves donations or rewards for many small contributions; P2P funding is a loan that must be repaid with interest.

4. Q4 · 1 mark · Very short answerHarder board level

   Why do equity shareholders bear the highest risk?

   Hint

   Last in line.

   Answer

   They are paid dividend and capital only after all creditors and preference shareholders.

5. Q5 · 2 marks · Short answerBoard level

   Briefly explain a venture capitalist.

   Hint

   Fund, growth.

   Answer

   A professional investment firm that invests pooled funds in high-risk, high-growth businesses for equity, takes an active role and exits after some years.

6. Q6 · 2 marks · Short answerHOTS / competency

   Suppose a company with highly uncertain profits must choose between debentures and equity shares. Advise with reasons.

   Hint

   Fixed burden.

   Answer

   Equity shares: there is no compulsory dividend, so no fixed burden when profits fall; debenture interest must be paid even in losses.

7. Q7 · 4 marks · Short answerHarder board level

   Explain public deposits as a source of finance, with one merit and one limitation.

   Hint

   Directly from public.

   Answer

   Deposits accepted by a company directly from the public for a fixed period, usually 6 months to 3 years, at interest higher than banks. Merit: simple and cheaper than bank loans. Limitation: short-term and available only to well-known companies.

8. Q8 · 4 marks · Short answerHOTS / competency

   Compare trade credit, bill discounting and factoring as ways of financing working capital.

   Hint

   Who gives, what is used.

   Answer

   Trade credit: suppliers allow later payment for purchases. Bill discounting: a bank pays now for an accepted bill, less discount. Factoring: a factor buys receivables, advances cash and collects debts for a fee. All finance working capital; the last two convert sales on credit into cash.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Shares with fixed dividend and priority?Show answer

   Preference shares.

2. 2.Return on debentures?Show answer

   Interest.

3. 3.Selling receivables to a financial firm?Show answer

   Factoring.

4. 4.Dollar receipts against Indian shares traded abroad?Show answer

   Global depository receipts.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Equity: ownership, variable dividend, voting, highest risk.
• ☐Preference: fixed dividend, priority, usually no vote.
• ☐Debentures and bonds: creditors, fixed interest, secured.
• ☐Trade credit, bill discounting, factoring: short-term working capital.
• ☐GDR: foreign-currency receipts against domestic shares.
• ☐Angel (individual, seed), VC (fund, growth), crowd funding (many small), P2P (direct loans online).

Sources of Business Finance: frequently asked questions