Business Financing

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Business Financing refers to the monetary aid that an entrepreneur requires for carrying out his business ventures. Businesses require a constant flow of funds at every stage of a business life cycle. Funds are needed for promoting and marketing the products; circulating it to the consumers; and also for managing the firm's human resource base. Further, in the present dynamic business environment characterized by high competition, huge funds are required for continuous development and up gradation of the business unit.

With the motive of providing financial support to the businesses, the Government of India has established a well developed financial system in the country. The financial system is an institutional setup through which the savings in the economy are stimulated and made available to the ultimate borrowers or investors.

The financial system operates through an association of financial markets and entities, which are broadly categorized into:-
  • Money market : it deals in short term funds
  • Capital market :it deals in long term funds
The Reserve Bank of India (RBI) is the ultimate authority, whereas the Securities and Exchange Board of India (SEBI) regulates the functioning of the capital market.

The major elements of the Indian financial system are:
  • Banks, it consists of nationalized banks, private sector banks, foreign banks, regional rural banks, co-operative banks
  • Financial Institutions, specialized financial institutions; investment institutions; State financial corporations, State industrial development corporations etc.
  • Non Banking Financial Companies
  • Venture capital companies


A bank is a financial body that accepts money from people in the form of deposits, which are usually repayable on demand or after expiry of a fixed time period. The deposits from public are used to lend money in the form of drafts and cheques, to those who need funds. The term lending includes both direct lending to borrowers and indirect lending through investment in open market securities.

The Reserve Bank of India (RBI) is the highest statutory body responsible for regulation of banking system in the country.

Banks in India are classified into:-
  • Scheduled Banks
  • Non scheduled Banks
The former includes those type of banks which are registered in the list of central bank under its charter are called scheduled banks. They render banking services according to the policies and instructions of central bank. These banks have a paid up capital of not less than Rs 5 lakh. The latter includes those type of banks which are not registered in the list of central bank under its charter are known as non-scheduled banks. They may not perform banking services as according to the policies and instructions of central bank.

The Scheduled Banks can further be classified into:-
  • Scheduled Commercial Banks
  • Scheduled co-operative Banks
The Scheduled Commercial Banks can further be categorized as:
  • Nationalized Banks, e.g Corporation Bank, Indian Bank
  • State Bank of India and its associates e.g State Bank of India, State Bank of Patiala
  • Regional Rural Banks (RRBs) e.g Andhra Pradesh Grameena Vikas Bank, Himachal Gramin Bank
  • Foreign banks e.g Citibank,HSBC, Standard Chartered Bank
  • Other Indian private sector banks.

At present there are 170 Scheduled Banks in the country out of which 91 are Regional Rural Banks,19 Nationalized Bank, 8 banks in State Banks of India Group and the Industrial Development Bank of India Ltd(IDBI).

There are only 4 Non Scheduled Commercial Banks in India.

Financial Institutions

The financial institutions are vital source of long-term funds for the economy. These institutions offer a variety of financial products and services to accomplish the diverse needs of the commercial sector. They also provide guidance to new business entities, small and medium sized firms as well as to the industries established in remote areas. Thus, they have contributed in reducing regional disparities.

In order to provide sufficient flow of credit to various sectors of the economy, the Government of India has created a well developed structure of financial institutions in the country. Depending upon the geographical vastness of their operations these financial institutions can be broadly classified into:-
  • National Level Institutions
  • State level institutions

The National Level Institutions provide long and medium term loans at affordable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans etc. They include :
  • All India Development Banks e.g. IDBI, SIDBI, IFCI Ltd, IIBI
  • Specialized Financial Institutions e.g. IVCF, ICICI Venture Funds Ltd, TFCI
  • Investment Institutions e.g. LIC, GIC, UTI
The State Level Institutions are mainly concerned with the administering the development of medium and small scale enterprises. These institutions also provide the same financial support as the National Level Institutions.

Capital market

Capital Market is one of the most important constituent of the Indian financial system. It offers all the facilities and the institutional provisions for borrowing and lending funds. We can say that it is concerned with the raising of money capital for purposes of making long-term investments. The market comprises of a number of individuals and entities including the Government that render the supply and demand for long -term capital and claims on it. Private sector manufacturing industries, agriculture sector, trade and the Government agencies are the main sources of demand for long term capital. Individuals, and corporate savings, banks and insurance companies, the surplus of the Government are the major sources of supply of funds for the capital market.

The Indian capital market is broadly classified into:-
  • Gilt-edged market and
  • Industrial Securities Market.
The gilt-edged market refers to the market for Government and semi-government securities, supported by RBI. Government securities are tradable debt instruments issued by the Government for meeting its financial requirements. The Government securities do not run the risk of default and can be easily sold in the capital market at their current prices thus is highly liquid.

The industrial securities market refers to the market which deals in equities and debentures of corporates. It is further divided into primary market and secondary market.

  • Primary Market:-It deals with new securities, that is, the securities which are offered to the general public for the first time. It provides the issuers of securities; Government as well as corporates, an opportunity to raise capital to fulfill their needs of investment for starting or diversifying a business and/or to discharge any obligation due on them. The capital can be raised in the form of shares/debentures. The new offerings by the companies are made either as an initial public offering (IPO) or rights issue.

  • Secondary market/ stock market: - It deals with buying and selling securities of the existing companies. It has been defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities”. The shareholders can easily monitor the movement of the share prices of the company listed on the stock exchange.

Venture Capital

Venture capital is a commitment of capital for the formation and establishment of small scale undertakings at the initial stages of their life cycle.

Venture capitalists provide Venture Capital Funds to these small scale firms after properly analyzing their projects. Their main motive is to earn huge returns on their investments. The Venture capitalist and the entrepreneur act as partners, wherein the former participates actively in the management of the company as well as render proficient and effective services of a good banker, technologist and manager.

In India, the venture capital funds are promoted by:-
  • Central Government regulated development finance institutions, e.g. ICICI Venture Funds Ltd.
  • State Government controlled development finance institutions, e.g. Punjab Infotech Venture Fund.
  • Public banks, e.g. SBI Capital Markets Ltd.
  • Private sector companies, e.g. Infinity Venture India Fund.
  • Overseas venture capital fund, e.g. Walden International Investment Group.
SEBI is the main agency that is concerned with regulation and registration of both domestic and overseas Venture Capital Funds.

Non Banking Financial Companies

Over the years Non-Banking Financial Companies (NBFCs) are becoming an important constituent of Indian financial system. It is a company registered under the Companies Act 956 and is an heterogeneous group of institutions (except commercial and co-operative banks) engaged in the business of accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They provide loans to the various wholesale and retail merchants, small-scale industries and self-employed persons. They offer customer-focused services; simplified procedures; high rates of return on deposits; flexibility and sufficient time in meeting the credit needs of specified sectors; etc.

These NBFCs are classified into three categories:-

  • Asset Finance Company (AFC)
  • Investment Company (IC) and
  • Loan Company (LC).
The actions and working of these financial institutions is governed by RBI.