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Question

Difficulty: MediumTypes and Sources of Business Capital

Match each type or source of business capital listed on the left with its correct defining characteristic or feature on the right.

  • DebenturesLong-term loan capital issued under company seal acknowledging borrowed funds at a fixed rate of interest.
  • Bank OverdraftShort-term bank credit facility permitting current account holders to draw funds beyond their available balance.
  • Trade CreditSpontaneous short-term supplier financing allowing businesses to obtain inventory now and pay at an agreed future date.
  • Equity SharesPermanent risk capital contributed by owners carrying full voting rights and variable dividend claims.

Answer

Debentures match with long-term loan capital issued under company seal; Bank Overdraft matches with short-term bank credit facility for overdrawing current accounts; Trade Credit matches with short-term supplier financing; Equity Shares match with permanent risk capital with voting rights.
Each business capital source is accurately paired with its duration, source, and legal character. Debentures are long-term debt instruments, equity shares are permanent risk capital, bank overdrafts are short-term bank credit facilities, and trade credit represents short-term mercantile supplier credit.

Step-by-Step Solution

1
Classify the duration horizon for each item (short-term vs long-term).
Debentures and Equity Shares are long-term sources, whereas Bank Overdraft and Trade Credit are short-term sources.
Distinguishing short-term working capital sources from long-term capital structure sources helps narrow matching options.
2
Differentiate long-term debt capital from equity ownership capital.
Debentures represent long-term creditor debt with fixed interest, while Equity Shares represent permanent proprietary ownership with variable dividends and voting rights.
Debenture holders are creditors of the firm, whereas equity shareholders are the owners.
3
Differentiate short-term bank credit from short-term mercantile credit.
Bank Overdraft is provided by commercial financial institutions on current accounts, whereas Trade Credit is extended directly by trade vendors on merchandise purchases.
Overdrafts involve bank borrowing facilities while trade credit is derived from trade supplier terms.

Key Concept

Types and Duration of Business Capital Sources
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Topics

Types and Sources of Business Capital

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