Sources of Business Finance Test - 50

Repayment of loans from financial institutions and commercial banks is typically made in equal installments over the loan term, consisting of both principal and interest payments. This structured repayment schedule helps borrowers manage their cash flow and budget effectively.

In a factoring arrangement, the factor is a financial institution or a specialized firm that purchases the accounts receivable of a business (the client) at a discount. The factor then assumes the responsibility for collecting the outstanding debts from the clients' customers. This allows the client to receive immediate cash flow by converting its accounts receivable into cash. The factor collects the payments from the customers and manages the credit control process, including chasing up late payments and handling any disputes.

Bondholders receive returns in the form of interest payments, which are typically fixed and paid at regular intervals. Unlike equity shareholders, bondholders do not receive dividends or capital gains based on the company's profitability or stock price appreciation. Royalties are payments made for the use of intellectual property, not returns on bonds.

Internal sources of capital refer to funds that are generated from within the business itself, without relying on external sources such as suppliers or financial institutions. These funds can come from retained earnings, depreciation provisions, or the sale of assets. Internal sources of capital provide the company with greater control over its finances and reduce reliance on external borrowing or equity issuance. Examples include profits reinvested into the business, proceeds from the sale of surplus assets, or funds generated from the company's operations.

Many firms issue convertible zero interest debentures in order to avoid paying interest over the period till conversion happens. After conversion, the dividend applicable on paid-up share capital will be paid.

Mahindra and Mahindra was the first company in India to issue convertible zero interest debentures in January 1990.

Debentures are characterized by fixed interest payments made to investors at regular intervals. Unlike equity shares, debenture holders do not have ownership rights or voting rights in company decisions. Additionally, debenture holders typically do not have priority in repayment over other creditors.

Lease is an agreement between two parties i.e. Lessor and Lessee for the use of asset in return of periodic payment and for a specified period.

Industrial Credit and Investment Corporation of India (ICICI) was established in 1955 as a public limited company under the Companies Act.

Investors who want steady income may not prefer Equity Shares.

Dividend payable to equity shareholders may keep fluctuating. Moreover It is not compulsory to pay dividend to equity shareholders.  

Trade credit allows businesses to defer payment for purchases, providing interest-free financing for their operations. It also offers flexibility in managing cash flow and working capital, as companies can use their funds for other immediate needs while delaying payment to suppliers.