CBSE Class 11 Business Studies Chapter 8: Sources of Business Finance NCERT Solutions

Reviewed by NCERT Help Editorial Team · Updated on 29 Jul 2026

NCERT Solutions PDF Class 11 PDF

CBSE Class 11 Business Studies Chapter 8, Sources of Business Finance, delves into the various ways businesses acquire the capital they need to operate and grow. This chapter explores fundamental financing options such as equity shares, which represent ownership, and preference shares, offering a fixed return. It also examines debt financing through debentures and commercial paper, alongside internal sources like retained earnings and external options like public deposits and lease financing. Understanding the roles of owners, creditors, and different financial instruments is vital for making sound financial decisions. This resource simplifies these concepts, helping students grasp the intricacies of business finance and prepare thoroughly for their exams.

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Board	CBSE
Class	Class 11
Subject	Business Studies
Session	2026
Language	English
Type	NCERT Solutions
Chapter	8. Sources of Business Finance

Chapter summary

Chapter 8 of the Class 11 Business Studies syllabus focuses on the various sources from which businesses can raise finance. This NCERT Solutions set clarifies concepts such as internal and external financing, long-term and short-term finance, and different financial instruments like shares, debentures, and bank loans. It addresses the requirements for fixed and working capital and explains the mechanisms of trade credit, factoring, and lease financing, providing a solid foundation for understanding business financial management.

Learning outcomes

Understand the distinction between equity and debt financing.
Identify and differentiate between various sources of long-term and short-term finance.
Explain the purpose and types of capital requirements (fixed and working).
Analyze the role of instruments like shares, debentures, and commercial paper.
Describe the functions of factoring and lease financing in business operations.

Topics covered

Paper topics

Business Finance
Fixed Capital Requirements
Working Capital Requirements
Equity Shares
Preference Shares
Debentures
Retained Earnings
Commercial Paper
Public Deposits
Factoring
Lease Financing
Sources of Finance

Important topics

Equity vs. Preference Shares
Debentures and Loan Capital
Internal vs. External Sources
Working Capital Needs
Role of Commercial Paper and Public Deposits
Lease Financing and Factoring

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Questions and Solutions

Multiple Choice Questions

Question 1. Equity shareholders are called:

(a) Owners of the company (b) Partners of the company

Solution: Equity shareholders are considered the owners of the company because they invest their capital in the business and, in return, receive ownership stakes. They have voting rights and are entitled to a share of the profits (dividends) and residual assets in case of liquidation. They are not partners, executives, or guardians.

Question 2. The term 'redeemable' is used for

(a) Preference shares (b) Commercial paper

Solution: The term 'redeemable' is specifically used for preference shares. Redeemable preference shares are those that the issuing company has the option or obligation to buy back from the shareholders at a specified price and after a specified period.

Question 3. Funds required for purchasing current assets is an example of

(a) Fixed capital requirement (b) Ploughing back of profits

Solution: Funds required for purchasing current assets, such as raw materials, inventory, and accounts receivable, are examples of the working capital requirement. Working capital is essential for the day-to-day operations of a business.

Question 4. ADRs are issued in

(a) Canada (b) China

Solution: ADRs, or American Depository Receipts, are certificates issued by U.S. banks that represent shares of a foreign company. They are traded on U.S. stock exchanges, making the USA the correct answer for where they are issued and traded.

Question 5. Public deposits are the deposits that are raised directly from

(a) The public (b) The directors

Solution: Public deposits are a source of finance where companies raise funds directly from the general public by inviting them to deposit money with the company for a fixed period, usually offering a higher interest rate than banks.

Question 6. Under the lease agreement, the lessee gets the right to

(a) Share profits earned by the lessor

(b) Participate in the management of the organization

(d) Sell the assets

Solution: In a lease agreement, the lessee (the party using the asset) obtains the right to use the asset for a specified period in exchange for regular lease payments (rent) to the lessor (the owner of the asset).

Question 7. Debentures represent

(a) Fixed capital of the company (b) Permanent capital of the company

Solution: Debentures represent loan capital of the company. They are debt instruments where the company borrows money from investors, promising to repay the principal amount on a specified date along with periodic interest payments.

Question 8. Under the factoring arrangement, the factor

Makes the payment on behalf of the client
Collects the client's debt or account receivables
Transfers the goods from one place to another

Solution: In a factoring arrangement, the factor is a financial institution that buys a company's accounts receivable (debts owed by customers) at a discount. The factor then takes responsibility for collecting these debts from the clients. Therefore, the factor collects the client's debt or account receivables.

Question 9. The maturity period of a commercial paper usually ranges from

20 to 40 days (b) 60 to 90 days
120 to 365 days (d) 90 to 364 days

Solution: Commercial paper is an unsecured, short-term debt instrument issued by corporations. Its maturity period typically ranges from a few days to 364 days, with common durations being between 90 to 364 days.

Question 10. Internal sources of capital are those that are

Generated through outsiders such as suppliers
Generated through loans from commercial banks
Generated through issue of shares
Generated within the business

Solution: Internal sources of capital are funds that are generated from within the business itself. The most common internal source is retained earnings, which are profits that are not distributed to shareholders but are reinvested back into the business.

Short Answer Type Questions

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

Solution: Business finance refers to the monetary resources required by a business to undertake its operations, achieve its objectives, and ensure its growth. Businesses need funds for various reasons:

Fixed Capital Requirements: Funds are needed to acquire and maintain long-term assets such as land, buildings, plant, and machinery. These assets are crucial for the production process and the overall infrastructure of the business.
Working Capital Requirements: Businesses also need funds for their day-to-day operations. This includes managing current assets like inventory, raw materials, accounts receivable, and meeting short-term liabilities such as salaries, wages, and operating expenses. Adequate working capital ensures smooth functioning and liquidity.

Without sufficient finance, a business cannot start, operate efficiently, or expand its activities.

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

Solution: Businesses can raise finance from various sources, which can be broadly categorized into long-term and short-term sources: Long-Term Sources of Finance: These are funds raised for a period of more than one year, typically for major investments and expansion.

Equity Shares: Issuing ordinary shares to the public or private investors.
Retained Earnings: Reinvesting profits earned by the business.
Preference Shares: Issuing shares that have priority in dividend payment and capital repayment.
Debentures: Issuing debt instruments to borrow funds from investors.
Loans from Financial Institutions: Obtaining long-term loans from banks and specialized financial institutions.
Lease Financing: Acquiring the use of an asset through a lease agreement instead of purchasing it outright.

Short-Term Sources of Finance: These are funds raised for a period of up to one year, typically for meeting working capital needs.

Trade Credit: Obtaining goods or services from suppliers on credit.
Factoring: Selling accounts receivable to a financial institution (factor).
Commercial Paper: Issuing short-term, unsecured promissory notes.
Public Deposits: Accepting deposits from the public for a fixed period.
Bank Loans/Overdrafts: Short-term borrowing facilities from commercial banks.

Common mistakes

Confusing equity shareholders with partners or executives.
Misidentifying the purpose of working capital versus fixed capital.
Not distinguishing between internal and external sources of finance.
Incorrectly recalling the maturity periods for financial instruments like commercial paper.

Revision tips

Create a table comparing different sources of finance based on cost, risk, and control.
Focus on understanding the key characteristics of each financial instrument (shares, debentures, etc.).
Review the distinction between fixed and working capital needs and their respective funding sources.
Practice explaining the concepts in your own words to solidify understanding.

Practice MCQs

Q1. Equity shareholders are primarily considered the:

Q2. Which type of shares can be 'redeemed' (bought back by the company) after a specified period?

Q3. Funds needed to purchase raw materials and pay for daily operational expenses fall under:

Q4. American Depository Receipts (ADRs), which allow foreign companies to trade on US stock exchanges, are issued in:

Q5. Public deposits are a form of finance raised directly from:

Q6. In a lease agreement, the lessee is granted the right to:

Q7. Debentures are best described as representing:

Q8. In a factoring arrangement, the factor's primary role related to the client's receivables is to:

Q9. Commercial paper typically has a maturity period ranging from:

Q10. Which of the following is considered an internal source of capital for a business?

Frequently asked questions

What is business finance and why is it essential?

Business finance refers to the money required to run and grow a business. Funds are essential for starting a business, purchasing assets, managing daily operations, and expanding operations.

What are the main categories of capital requirements for a business?

Businesses have two main capital requirements: fixed capital for long-term assets like land and machinery, and working capital for day-to-day operations and current assets like inventory.

What is the difference between equity shares and preference shares?

Equity shareholders are the owners with voting rights and variable returns, while preference shareholders have priority in receiving dividends and capital repayment but usually no voting rights.

What are debentures?

Debentures are a type of loan certificate issued by companies to raise funds. They represent borrowed capital, carry a fixed rate of interest, and must be repaid on maturity.

Can you explain internal sources of finance?

Internal sources of finance are generated from within the business, primarily through retained earnings (profits not distributed to shareholders). This is a cost-effective way to fund operations and growth.

What are some short-term external sources of finance?

Short-term external sources include trade credit from suppliers, commercial paper (unsecured short-term promissory notes), public deposits, and bank overdrafts.

How do factoring and lease financing help businesses?

Factoring helps businesses by converting their accounts receivable into immediate cash. Lease financing allows businesses to use an asset by paying rent, without the large upfront cost of purchasing it.

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