Business Finance and Sources of Capital
Capital structure
The exam tests the distinction between fixed and working capital, owned and borrowed funds, and short-, medium- and long-term sources. Fixed capital buys land, building, plant and machinery; working capital finances raw material, wages, stock and receivables. Sources include promoter savings, friends and family, bank term loans and cash credit, SIDBI refinance, NBFCs, leasing, trade credit, angel/venture capital and government schemes. Lenders assess the 3 Cs - character, capacity and collateral - and often want a project report, margin money and a repayment plan. CGTMSE provides guarantee cover for eligible collateral-free loans; it does not remove repayment risk. Subsidies are usually margin money, not cash in hand.
Worked example
A project costs ₹20 lakh: fixed assets ₹14 lakh, working capital ₹6 lakh. The promoter contributes ₹4 lakh; the bank sanctions a ₹10 lakh term loan and ₹6 lakh working-capital limit. Debt is ₹16 lakh and equity ₹4 lakh, so debt–equity is 4:1. The term loan is long-term; the cash credit is short-term and reviewed annually. The promoter must still fund any cost overrun.
Traps that cost marks
Do not use a term loan to finance daily wages permanently. Do not treat a guarantee scheme as a loan. Do not calculate debt–equity using only the term loan if working-capital borrowing is also outside liability. Do not assume subsidy is paid before the unit is set up.