Business Finance & Ethics

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Social Responsibilities of Business & Business Ethics Introduction to Social Responsibility Business uses societal resources and provides output in return. It fulfills societal expectations; activities should be desirable. Some believe social responsibility is towards owners; others argue it's to all sections of society affected by decisions. Concept of Social Responsibility Obligation of a business to make decisions and perform actions desirable in terms of societal objectives and values. Supplying good quality goods Creating healthy working conditions Honestly paying taxes Installing pollution devices, etc. Arguments FOR Social Responsibility (Importance) Justification for Existence and Growth: Prosperity and growth require continuous service to society. Long-term Interest of the Firm: Short-term profits are possible, but long-term survival requires keeping society happy. Avoidance of Government Regulation: Voluntarily undertaking social responsibilities can help businesses avoid limiting government regulations. Maintenance of Society: Socially responsible businesses contribute to social peace and harmony. Availability of Resources with Business: Businesses have financial and human resources to solve societal problems (e.g., managerial talent, capital resources). Converting Problems into Opportunities: Businesses can solve social problems and turn challenges into opportunities (e.g., COVID-19 mask/sanitizer production). Better Environment for Doing Business: Operating in a problematic society reduces success chances; businesses should address societal issues. Holding Business Responsible for Social Problems: Businesses often create or perpetuate social problems (e.g., pollution, unsafe workplaces), making involvement in solutions a moral obligation. Arguments AGAINST Social Responsibility Violation of Profit Maximization Objective: Business exists for profit maximization; social responsibility goes against this. Maximizing profits through efficiency serves society best. Burden on Consumers: Social responsibilities (e.g., pollution control) are costly and require huge investments. Businesses may pass these costs to consumers via higher prices. Lack of Social Skills: Businessmen lack the expertise to solve social problems; these should be handled by specialized agencies. Lack of Broad Public Support: Public generally dislikes business involvement in social programs, hindering successful operation due to lack of confidence. Reality of Social Responsibility Threat of Public Regulation: Irresponsible business behavior leads to regulation for public interest (e.g., penalties for waste disposal). Pressure of Labor Movement: Educated and organized labor movements necessitate business attention to worker welfare. Impact of Consumer Consciousness: Educated consumers and market competition have shifted power; "customer is king" replaces "caveat emptor." Development of Social Standard for Business: New social standards legitimize economic activity only if it also serves social needs. Relationship between Social Interest and Business Interest: Businesses realize social and business interests are complementary; long-term benefit lies in serving society. Development of Professional, Managerial Class: Professional management education fosters a different attitude towards social responsibility compared to owner-managers. Kinds of Social Responsibility Economic Responsibility: Primary focus is profit creation through economic growth. Legal Responsibility: Operate within the laws of the land, which are for societal good. Ethical Responsibility: Behavior expected by society but not legally codified (e.g., fair wages, respecting culture). Involves voluntary action. Discretionary Responsibility: Purely voluntary obligations (e.g., charitable donations, disaster relief). Companies have a moral duty to improve society. Social Responsibility Towards Different Interest Groups Shareholders/Owners: Provide fair return on capital investment. Ensure investment safety. Provide regular, accurate, full information on working and future growth. Workers: Provide opportunities for meaningful work. Create good working conditions to foster cooperation. Respect democratic rights to form unions. Ensure fair wages and fair treatment. Land Pollution: Dumping toxic waste damages land, making it unfit for agriculture. Restoring damaged land is a major problem. Noise Pollution: Caused by factories/vehicles, a serious health hazard. Can cause hearing loss, heart malfunction, mental disorders. Need for Pollution Control Reduction of Health Hazards: Pollutants cause diseases (cancer, heart attacks, lung complications). Reduces liability risk for businesses. Cost Savings: Effective pollution control saves operating costs, especially by reducing waste and disposal costs. Improved Public Image: Society's environmental consciousness means pro-environment firms gain good reputation and are seen as socially responsible. Other Social Benefits: Pollution control leads to clearer visibility, cleaner buildings, better quality of life, and purer natural products. Role of Business in Environmental Protection Businesses should lead in providing solutions to environmental problems. Small changes can significantly reduce pollution: Production and redesign of equipment. Substituting poor quality materials with better ones. Specific steps for businesses: Definite commitment by top management for environmental protection. Ensure thought is shared throughout enterprise by all divisions/employees. Develop clear policies/programs for pollution control activities. Comply with environmental laws (e.g., Environment Protection Act, 1986). Participate in government environmental protection programs. Periodically assess pollution control programs' costs/benefits to improve progress. Arrange educational workshops/training to share technical information and involve stakeholders in pollution control. Business Ethics Set of principles (written or unwritten) governing professional or human activity (e.g., fair prices, fair treatment of workers, reasonable profits). Elements of Business Ethics Top Management Commitment: Strong, open commitment to ethical conduct; continuous leadership for upholding organizational values. Publication of a 'Code': Written documents defining principles of conduct (e.g., honesty, adherence to laws, product safety, health/safety). Establishment of Compliance Mechanisms: Mechanisms to ensure decisions/actions comply with ethical standards (e.g., values-based hiring, regular auditing). Measuring Results: Difficult to measure exact results, but firms audit compliance. Top management discusses results for future action. Formation of a Company Introduction Modern business requires large funds, faces increasing competition, and rapid technological change, increasing risk. Company form is preferred for medium to large organizations. A company is an artificial person with separate legal entity, perpetual succession, and common seal. Steps from business idea to legal readiness are stages of company formation. Those taking these steps and risks are promoters. Formation of a Company Stages Complex activity involving legal formalities and procedures, divided into three stages: Promotion Incorporation Subscription of Capital Promotion of a Company Entire process of bringing a company into existence, from conceiving a business idea to forming the company to exploit opportunities. Persons or groups forming a company are promoters. As per Section 69, a promoter is: Named in a prospectus or identified in annual return (Section 92). Has control over company affairs (directly/indirectly as shareholder, director, etc.). Board of Directors acts according to their advice/directions. Functions of a Promoter Identification of Business Opportunity: First activity is to identify a business opportunity (new product/service, new distribution channel, investment potential). Feasibility Studies: Not all opportunities are profitable. Promoters conduct detailed studies with specialists (engineers, CAs) to assess profitability. Technical Feasibility: Idea may be good but technically impossible to execute (e.g., raw material/technology unavailable). Financial Feasibility: Estimate fund requirements. If outlay is too large to arrange, project is abandoned. Economic Feasibility: If profitability chance is low, idea is dropped. Promoters often use experts for these studies. Name Approval: Select a name, submit application to Registrar of Companies in the state of registered office for approval. Proposed name may be rejected if undesirable, similar to existing company, or misleading. Fixing up Signatories to the Memorandum of Association: Decide members signing MoA; usually first directors. Written consent to act as directors and take qualification shares is required. Appointment of Professionals: Appoint mercantile bankers, auditors, etc., to assist in preparing documents for Registrar of Companies. Preparation of Necessary Documents: Prepare legal documents for registration: Memorandum of Association, Articles of Association, and Consent of Directors. Documents Required to be Submitted Memorandum of Association (MoA): Most important document, defines company objectives. No company can legally undertake activities outside its MoA. Contains clauses: Name Clause: Company name, already approved by Registrar. Registered Office Clause: State of registered office. Exact address not needed at this stage but must be notified within 30 days of incorporation. Objects Clause: Purpose for which company is formed. Company cannot undertake activities beyond stated objects. Main objects are listed. Acts essential or incidental to main objects are valid even if not clearly stated. Liability Clause: Limits members' liability to unpaid amount on shares. Capital Clause: Specifies maximum capital company can raise through share issue. Authorized share capital and division into fixed face value shares are specified. MoA forms based on company type: Table Type of MoA 1 Table 1 MoA of a company limited by shares 2 Table 2 MoA of a company limited by guarantee and not having share capital 3 Table 3 MoA of a company limited by guarantee and not having share capital 4 Table 4 MoA of an unlimited company and not having share capital 5 Table 5 MoA of an unlimited company and having share capital Participants express desire to be connected and subscribe to shares. MoA shall be in forms specified in Tables A, B, C, D, E of Schedule I. Must be signed by at least seven persons for public company, two for private company. Articles of Association (AoA): Guidelines for internal management, supplementary to MoA. Should not conflict with MoA. Companies Act, 2013, 'articles' means AoA as originally framed or altered. Contents of the Articles of Association: Lien of shares. Calls on shares. Transfer/transmission of shares. Forfeiture/surrender of shares. Conversion of shares to stocks. Share warrants. Alteration of capital (increase, decrease, rearrangement). General meetings and proceedings. Voting rights of members. Appointment, remuneration, qualifications, powers of directors. Proceedings of board meetings. Dividends and reserves. Accounts and Audits. Borrowing Powers. Winding up provisions. Table Type of AoA 6 Table F AoA of a company limited by shares 7 Table G AoA of a company limited by guarantee and having share capital 8 Table H AoA of an limited by guarantee and not having share capital 9 Table I AoA of an unlimited company and having share capital 10 Table J AoA of an unlimited company and not having share capital Articles shall be in forms specified in Table F, G, H, I, J of Schedule I. Companies can make their own articles, even if contrary to Table F,G,H,I,J clauses. Consent of Proposed Directors: Written consent from each director agreeing to act and purchase qualification shares. Agreement: Agreement with proposed Managing Director or whole-time director. Statutory Declaration: Declaration confirming compliance with all legal registration requirements. Signed by advocate, CA, Cost Accountant, CS in practice, or director/manager/secretary named in articles. Receipt of Payment of Fee: Necessary fees for registration, depending on authorized share capital. Qualification Shares Articles often require directors to buy a certain number of shares to have a stake. Paid before Certificate of Commencement of Business. Articles generally contain matters like: Exclusion of Table F. Adoption of preliminary contracts. Number and value of shares. Issue of preference shares. Allotment of shares. Calls on shares. Lien on shares. Transfer and transmission of shares. Nomination. Forfeiture of shares. Alteration of capital. Buy back. Share certificates. Dematerialization. Conversion of shares into stock. Voting rights and proxies. Position of Promoters Promoters undertake activities to register a company and enable commencement of business. They are neither agents nor trustees of the company. Not agents because the company is not yet incorporated; personally liable for pre-incorporation contracts if not ratified later. Not trustees; can make profit only if disclosed, must not make secret profits. If non-disclosure, company can rescind contract, recover purchase price, claim damages. Not legally entitled to claim promotion expenses, but company may reimburse them. Company may remunerate promoters with lump sum, commission on property purchase, or shares/debentures/options. Incorporation Promoters apply for incorporation to the Registrar of Companies in the state of the registered office. Application for registration must be accompanied by documents: Duly stamped, signed, witnessed MoA. Duly stamped, witnessed AoA (public company may adopt Table A; if so, prospectus in lieu of AoA). Written consent of proposed directors to act and undertaking to purchase qualification shares. Agreement with proposed MD/Manager. Registrar's letter approving name. Statutory declaration of compliance. Notice of registered office address (can be submitted within 30 days of incorporation). Documentary evidence of registration fees payment. A company is legally born on the date on the Certificate of Incorporation, becoming a legal entity with perpetual succession and ability to enter contracts. Certificate of Incorporation is conclusive evidence of regular incorporation. Registrar allots a CIN (Corporate Identity Number) since Nov 1, 2000. Director Identification Number (DIN): Individuals intending to be directors apply for DIN to Central Government. Effect of the Certificate of Incorporation Company is legally born on the date printed on the Certificate of Incorporation. Becomes a legal entity with perpetual succession. Entitled to enter into valid contracts. Conclusive evidence of regularity of incorporation. Protects unsuspecting parties from improper or invalid incorporation. Sources of Business Finance (Chapter 8) Meaning, Nature and Significance of Business Finance Business finance refers to funds required for business activities. Adequate funds are essential for business function. Involves assessing financial needs and identifying sources. Funds needed for immediate and day-to-day operations. Different Financial Needs of a Business Fixed Capital Requirements: Funds for fixed assets (land, building, plant, machinery). Varies by business nature. Working Capital Requirements: Funds for day-to-day operations (stock, receivables, salaries, rent). Classification of Sources of Funds SOURCE OF FUNDS CLASSIFICATION On the basis of period On the basis of ownership On the basis of source Long-term sources Medium-term sources Short-term sources 1.Equity shares 2.Debentures 3.preference shares 4.loans 1.Loan 2.Public 3.Lease financing 1. Trade credit 2. Factoring 3. Banks 4.Commercial paper On the Basis of Period Long-term Sources: For periods exceeding 5 years (e.g., shares, debentures, long-term borrowings). Used for fixed assets. Medium-term Sources: For 1-5 years (e.g., commercial bank borrowings, financial institution loans). Used when long-term options are unavailable or for deferred revenue expenditures. Short-term Sources: For periods not exceeding 1 year (e.g., trade credit, commercial bank loans, commercial papers). Most common for financing current assets. On the Basis of Ownership On the basis of ownership Owner's funds Borrowed funds Owner's Funds: Provided by owners (sole trader, partners, company). Invested for longer duration, not refunded during business life. Forms basis for owners' control of management. Equity shares and retained earnings are key sources. Borrowed Funds: Funds raised through loans or borrowings. Sources include commercial banks, financial institutions, debentures, public deposits, trade credit. Provided for specified period with terms, repaid upon expiry. Fixed interest rate paid. Generally secured by fixed assets. Sources of Finance (Internal vs. External) Source of generation Internal sources External sources 1.Equity shares 2.Retained earnings 1. Debentures 2. Loan 3. Preference share capital 4. Public deposits 5. Lease financing 6. Commercial paper Internal Sources: Generated within the business (e.g., accelerating receivables, disposing of surplus, retained earnings). Fulfill limited needs. External Sources: From outside the organization (e.g., suppliers, lenders, investors). Used for large amounts, can be costly. I. Retained Earnings Portion of net earnings retained for future use, also known as internal financing or 'ploughing back of profits'. After tax and dividend. Depends on net profits, dividend policy, organization age. Merits: Permanent source of funds. No explicit cost (interest, dividend, floatation). Greater operational freedom/flexibility. Enhances capacity to absorb losses. May increase market price of equity shares. Limitations: Excessive ploughing back may dissatisfy shareholders (lower dividends). Uncertain source as profits fluctuate. Opportunity cost often unrecognized, leading to suboptimal use. II. Trade Credit Credit extended by one trader to another for goods/services. Facilitates purchases without immediate payment. Appears as 'sundry creditors' or 'accounts payable'. Commonly used for short-term financing. Granted to customers with good financial standing/goodwill. Volume/period depend on buyer's reputation, seller's financial position. Terms vary by industry/person. Merits: Convenient and continuous source. Readily available if creditworthiness is known. Promotes sales. Useful for increasing inventory to meet expected sales. Does not create charge on firm's assets. Limitations: Easy/flexible credit may lead to overtrading, increasing firm risk. Limited funds generated. Generally costly compared to other sources. III. Factoring Financial arrangement where a firm sells its trade debts (receivables) to a financial institution (factor) at discounted prices. Factor provides services: Discounting bills and collecting debts. Provides information about creditworthiness of prospective clients. Factors hold extensive trading history data, useful for avoiding customers with poor payment records. May offer consultancy in finance, marketing. Factor charges fees. Organizations offering factoring: SBI Factors, Canbank Factors, non-banking finance companies. Methods: Recourse: Client is NOT protected against bad debts. Non-Recourse: Factor assumes full credit risk; pays full invoice amount even if debt goes bad. Merits: Cheaper than bank credit. Accelerates cash flow, enabling prompt liability payment. Flexible, ensures definite cash inflows from credit sales. Provides security for debts the firm might not otherwise obtain. No charge created on firm's assets. Client can focus on other business areas as factor handles credit control. Limitations: Expensive for numerous small invoices. Advance finance from factor is at a higher interest cost. Customer may be uncomfortable dealing with a third-party factor. IV. Lease Financing Contractual agreement where asset owner (lessor) grants use right to another party (lessee) for periodic payment (lease rental). Terms specified in lease contract. Asset returns to lessor at end of period. Merits: Lessee acquires asset with lower investment. Simple documentation makes financing easier. Lease rentals are tax-deductible. Provides finance without diluting ownership/control. Does not affect debt-raising capacity. Lessor bears obsolescence risk, giving lessee flexibility to replace assets. Limitations: May impose restrictions on asset use. Normal business operations affected if lease not renewed. Higher payout obligation if equipment becomes useless. Lessee never becomes asset owner, loses residual value. V. Public Deposits Deposits raised directly from the public by organizations. Offer higher interest rates than bank deposits. Individuals deposit by filling a form; organization issues deposit receipt. Can meet medium- and short-term financial needs. Cost of deposits generally lower than bank borrowings. Companies typically invite deposits for up to three years. Merits: Simple procedure, no restrictive conditions like loan agreements. Lower cost than bank/financial institution borrowings. Do not create charge on assets, allowing assets to secure other loans. No dilution of company control as depositors have no voting rights. Limitations: New companies find it difficult to raise funds. Unreliable source; public may not respond when funds are needed. Collection can be difficult, especially for large deposits. VI. Commercial Paper (CP) Unsecured promissory note for short-term finance (90-364 days), emerged in India in the 1990s. Issued by firms to other businesses, insurance companies, pension funds, banks. Large amounts raised. Only firms with good credit ratings can issue CP as it's unsecured. Regulated by Reserve Bank of India. Merits: Sold unsecured, no restrictive conditions. Freely transferable, high liquidity. Provides more funds than some other sources. Continuous source of funds. Companies can park excess funds for good returns. Limitations: Only financially sound and highly rated firms can raise money. Amount raised limited by available liquidity of funders. Impersonal financing; no extension if firm faces difficulties. VII. Issue of Shares Capital obtained from shares is share capital. Company capital divided into small units (shares), each with nominal value. Shareholder holds shares. Two types: Equity Shares and Preference Shares. Equity shares issue raises equity share capital. Preference shares issue raises preference share capital. A. Equity Shares Represent ownership, capital from them is ownership capital/owner's funds. Prerequisite for company creation. No fixed dividend; paid based on earnings. "Residual owners" – receive what's left after all other claims. Enjoy rewards and bear ownership risk. Liability limited to capital contributed. Right to vote, participate in management. Merits: Suitable for investors willing to risk for higher returns. Dividend payment not compulsory, no burden on company. Permanent capital, repaid only on liquidation. Provides creditworthiness and confidence to lenders. Funds raised without creating charge on company assets. Democratic control via voting rights. Limitations: Not for investors seeking steady income (fluctuating returns). Cost of equity generally higher than other sources. Issue of additional shares dilutes voting power and existing shareholders' earnings. More formalities and procedural delays. B. Preference Shares Capital raised by preference share issue. Preferential position over equity shareholders: Receive fixed dividend from net profits before equity shareholders. Receive capital after creditors' claims, at liquidation. Resemble debentures (fixed return) and equity (dividend discretionary, out of profit). No voting rights. Merits: Provide reasonably steady income and safety of investment. Useful for investors wanting fixed return with low risk. Does not affect equity shareholders' control. Fixed dividend payment may enable higher equity dividends in good times. Preferential repayment right over equity shareholders upon liquidation. Does not create charge on company assets. Limitations: Not for investors seeking high risk/high returns. Dilutes equity shareholders' claims over assets. Dividend rate generally higher than debenture interest. No assured return; paid only if company earns profit. Dividend not tax-deductible (unlike loan interest). Types of Preference Shares Cumulative and Non-Cumulative: Cumulative: Right to accumulate unpaid dividends for future payment. Non-Cumulative: Dividend not accumulated if not paid in a year. Participating and Non-Participating: Participating: Right to participate in further surplus profits after fixed dividend on equity shares. Non-Participating: Do not enjoy participation rights in profits. Convertible and Non-Convertible: Convertible: Can be converted into equity shares within a specified period. Non-Convertible: Cannot be converted into equity shares. VIII. Debentures Company raises funds by issuing debentures, which bear a fixed interest rate. Acknowledgment of borrowed money, repayable at future date. Debenture holders are creditors. Fixed interest paid at specified intervals (e.g., six months, one year). Public issue requires rating by credit agency (e.g., CRISIL). Difference between face value and purchase price is investor return. Various types of debentures can be issued. Merits: Preferred by investors seeking fixed income at lesser risk. Fixed charge funds; do not participate in profits. Suitable when sales/earnings are stable. No dilution of equity shareholders' control (no voting rights). Less costly than preference/equity capital; interest is tax deductible. Limitations: Fixed charge instruments; permanent burden on earnings. Redeemable debentures require repayment provisions even during financial difficulty. Reduces company's borrowing capacity. Types of Debentures Secured and Unsecured: Secured: Create a charge (mortgage) on company assets. Unsecured: No charge or security on assets. Registered and Bearer: Registered: Duly recorded in debenture holders register; transferred via regular instrument. Bearer: Transferred by mere delivery; company keeps no record. Convertible and Non-Convertible: Convertible: Can be converted into equity shares after specified period. Non-Convertible: Cannot be converted into equity shares. First and Second: First: Repaid before other debentures. Second: Repaid after first debentures. IX. Commercial Banks Provide funds for various purposes and time periods (cash credits, overdrafts, bill discounting). Interest rate depends on firm characteristics and economic rates. Loan repaid in lump sum or installments; not permanent source. Generally for medium to short periods. Borrower must provide security or create charge on assets. Merits: Timely assistance. Business secrecy maintained (information confidential). No prospectus/underwriting formalities, easier. Flexible source; loan amount can be increased/repaid early. Limitations: Funds for short periods; extension uncertain. Banks demand detailed investigation, security, making procedure difficult. May impose difficult terms/conditions. X. Financial Institutions Established by central/state governments, provide owned and loan capital for long/medium-term needs, supplementing commercial banks. Also called 'development banks'. Aim to promote industrial development. Conduct market surveys, provide technical/managerial assistance. Suitable for large, long-duration funds (expansion, reorganization, modernization). Examples: LIC, IDBI. Merits: Provide long-term finance unavailable from commercial banks. Offer financial, managerial, technical advice/consultancy. Obtaining loan increases goodwill, easing funds raising from other sources. Repayment in easy installments reduces burden. Funds available even during depression when other sources are scarce. Limitations: Too many formalities, time-consuming, expensive. Restrictions (e.g., on dividend payment) imposed on borrowing company's powers. Nominees on Board of Directors restrict company powers. International Financing I. Commercial Banks Extend foreign currency loans for business purposes worldwide. Important source for non-trade international operations. Loan types and services vary by country. II. International Agencies and Development Banks Provide long/medium-term loans/grants to promote development in economically backward areas. Set up by developed countries' governments at national, regional, international levels. Examples: International Finance Corporation (IFC), EXIM Bank, Asian Development Bank. III. International Capital Markets Financial market where shares, bonds, debentures, other long-term securities are purchased/sold. Modern organizations, including MNCs, rely on borrowings in rupees and foreign currency. Prominent financial instruments: Global Depository Receipts (GDRs): Local currency shares delivered to depository bank, which issues depository receipts in US dollars. Negotiable instrument, traded freely. In India, issued abroad by Indian company to raise foreign currency, listed/traded on foreign stock exchange. Holder can convert to shares. No voting rights, but receive dividends/capital appreciation. American Depository Receipts (ADRs): Depository receipts issued by a company in the USA. Bought/sold in American markets like regular stocks. Similar to GDRs but issued only to American citizens, listed/traded on US stock exchange. Indian Depository Receipts (IDRs): Financial instrument in Indian Rupees, form of Depository Receipt. Created by Indian Depository for foreign company to raise funds from Indian securities market. Specific Indian version of global depository receipts. Foreign company deposits shares to Indian Depository, which issues receipts to Indian investors. Benefits (bonus, dividends) accrue to IDR holders. Issued to Indian residents per SEBI guidelines, similar to domestic shares. Issuer company makes public offer in India; residents bid in same format as Indian shares. Foreign Currency Convertible Bonds (FCCBs): Equity-linked debt securities, convertible to equity or depository receipts after a specific period. Holder has option to convert to equity shares at predetermined price/exchange rate, or retain bonds. Issued in foreign currency, fixed interest rate (lower than non-convertible debt). Listed/traded on foreign stock exchanges. Similar to convertible debentures in India. Factors Affecting the Choice of the Source of Funds Cost: Consider procurement cost and utilization cost. Both costs influence decision on funding source. Financial Strength and Stability of Operations: Business must be financially sound to repay principal/interest. If earnings are unstable, fixed-charge funds (preference shares, debentures) add financial burden, should be carefully selected. Form of Organization and Legal Status: Influences choice of source. Partnership cannot issue equity shares, only a joint stock company can. Purpose and Time Period: Short-term needs: trade credit, commercial paper (low interest). Long-term needs: shares, debentures. Match source to purpose. Risk Profile: Evaluate risk for each source. Loan has repayment schedule for principal/interest, paid regardless of profit/loss. Control: Source choice affects owner control. Equity shares may dilute control. Choose source based on willingness to share control. Effect on Creditworthiness: Source dependence affects market creditworthiness. Secured debentures may affect unsecured creditors' willingness to extend loans. Flexibility and Ease: Restrictive provisions, detailed investigation for bank/FI borrowings may make them undesirable if other options exist.