Business

What Is Finance And Types Of Financing

Finance can be defined as the art and science of managing money. Virtually, all individuals and organizations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets and instruments involved in the transfer of money among individuals, business and governments.

At present, we cannot imagine a world without Finance. In other words Finance is the soul of our economic activities. To perform any economic activity, we need certain resources, which are to be pooled in terms of money (i.e. in the form of currency notes, other valuables, etc.).

Finance is a prerequisite for obtaining physical resources, which are needed to perform productive activities and carrying business operations such as sales, pay compensations, reserve for contingencies (unascertained liabilities) and so on.

Hence, Finance has now become an organic function and inseparable part of our day-to-day lives. Today, it has become a word which we often encounter on our daily basis.

Finance is defined in numerous ways by different groups of people. Though it IS difficult to give a perfect definition of Finance following selected statements will help you deduce its broad meaning.

Types of Financing

(1) Equity Financing : It is the money invested into your business in exchange for a share in its ownership. While debt funding is the most common form of financing for small businesses, many businesses and companies private or institutional investors in exchange for an equity ownership stake in the company. There are a number of sources of equity finance available to business. This includes:

  • Personal Savings : It is the basic money that you personally invest into the business.
  • Friends and Relatives : These are the people that you personally know family invest into the business to lend assistance. In this arrangement, a member or friend will provide you with capital in exchange for an appropriate stake (i.e. stock) in your company.
  • Angel Investors : Angel investors are wealthy individuals who lend their personal finances to a business in return for a share in its ownership. These high net worth private investors. In addition to money, angels often impart their business wisdom, guidance, and networking opportunities. While angels do invest in tens of thousands of companies each year, this funding source if difficult to find for the average small business.
  • Venture Capital : These professional investors are serious players in the investing world. They invest in companies with the expansion potential to grow into major businesses with high profits for shareholders. As a result, they look for young companies that are beyond the startup phase are  growth companies and are willing to go public in the near future (approx. 3-5 years). For this applications to professionally manged third parties

(2) Debt Financing – Debt financing is attractive to small business owner, since it can easier to obtain than equity financing and one do not have to give up any equity in his company. On the one side, one will need to pay back loan with interest, and may need to provide personal collateral ( such as his income ) to guarantee the business loan. Usually in the form of loan where the personal amount borrowed and interest accumulated on the loan needs to be paid. There are also a range of opportunities to secure debt financing such as:

  • Leasing :  It is the hiring out of equipment for a regular fee for the duration of the lease term, with no outlay to actually purchase equipment.
  • Credit Cards : These are easy to acquire financial institution loans that carry high interest rates.
  • Bank Overdrafts : It is the facility basically provided by your bank where you withdraw more than your account contains, with interest calculated on your outstanding balance.
  • Commercial Bills : It is the short term loan where the amount must be paid in full upon reaching expiry.
  • Loan Programs : These are short term loans set up to assist small business with initial start up expenses.
  • Trade Credit : Trade credit is the deferred payment of goods and services purchased from a supplier.

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