Types Of Finance With Explanation
Types Of Finance With Explanation. Evidence has shown that the origin of finance is as old as human life on this earth. The word finance is originally a French word. In the 18th century. The English took over the meaning of “management of money”. Finance is the management of funds or money and includes budgeting, borrowing, forecasting, investing, and saving. It is the study of fund management and raising funds required.
Types Of Funding
There are two types of financing:
Debt Financing Etc
Each of the types is explained below with a definition and explanation.
1. External Financing Is One Of The Types Of Finance
The money you acquire to maintain or operate your business is debt financing. Debt financing does not confer ownership control on the lender; So the borrower must repay the principal along with the agreed interest rate. Because a rule, the interest rate depends on the amount of the loan, its term, the purpose of the loan, the specific type of financing and the inflation rate.
Debt financing can be classified into three types:
In the short term
Short-Term Debt Financing Is One Of The Types Of Finance
Loans that are generally needed for periods more extended than one to one hundred and eighty days are known as short-term debt financing. So these loans are taken out to meet a lack of funds and temporary or occasional needs. Because short-term funding is required for day-to-day business, such as paying employee salaries or procuring raw materials. So the size of a short-term loan depends mainly on other sources of income for its disbursement. But business lines of credit are the most common forms of short-term debt financing.
Others include business loans, credit cards, bill discounting, overdrafts, working capital loans, small business loans, short-term retail bank loans, and customer advances.
Medium-Term Debt Financing Is One Of The Types Of Finance
Loans generally needed for a period longer than one hundred and eighty to three hundred and sixty-five days are refer to as medium-term debt financing. But how you use the funds mainly depends on the type of business. So companies choose this type of financing to purchase equipment, fixed assets, etc. And businesses typically repay the loan using commercial sources of funds.
Small business owners or startups sometimes use medium-term debt financing to ensure capital turnover. But leases, leasing, term borrowings from commercial banks, and issuance of bonds/debentures. And are examples of medium-term debt financing. So new businesses have to prepay suppliers for any commodity they need, such as buying equipment, machinery, inventory, etc.
Long-Term Debt Financing:
Loans that are generally needed for a period of more than three hundred and sixty-five days are known as long-term debt financing. But this type of financing is mainly required to purchase a company’s factories, land, office or building restructuring, etc. So long-term financing has a better interest rate than short-term financing. And this debt financing usually has a term of five, ten or twenty years.
Car loans or home loans are two famous examples of long-term financing. Bond/debt issuance, preferred stock issuance, stock issuance, long-term loans from governments, financial services institutions, investment banks, venture capital financing, or mutual funds are other examples of long-term debt financing.
2. Capital Financing:
Equity financing is a classic form of raising capital for companies by issuing or offering company shares. And it is one of the main differences between equity financing and debt financing.
This funding is typically used as seed funding for startups and startups. So recognized companies use this funding to obtain additional capital to grow their business.
Equity financing usually takes the form of issues or the offering of company shares. But each share is a unit of ownership for that specific company. For example, if the company has offered 10,000 shares to public investors. Because an investor buys 1,000 shares of that company. Which means they own 10% of the company.
Other types of funding are discuss below:
Public finance is concerned with the study of government spending and revenue. Because it only takes into account government finances. And the area of public finance includes raising funds and their distribution among the various areas of government activity. So they are considered essential functions or tasks of government.
Public finances can be classified into three types:
Public Expenditure ,public revenue and national debt
I. Public Expenditure:
Public spending refers to government spending on its maintenance and the welfare and maintenance of the economy, society and the nation.
ii. Public Revenue:
In general, government revenue includes all receipts and payments that the government acquires, but regardless of their nature or source, during a given period.
It includes loans received from the state. Strictly speaking, only income from revenue sources, including taxes, bonuses, fees, penalties, fines, gifts, etc., are consider.
Iii. National Debt:
Government debt refers to contracted loans that are a public funding source and an obligation to repay individuals and interest.
Personal Finances Is One Of The Types Of Finance
Personal finance refers to applying financial principles to a family’s or an individual’s financial decisions. So it encompasses the way families or individuals earn, budget, spend, and save financial resources over time. And taking into account different life events and future financial risks.
The economic picture focuses on understanding the personal resources available by looking at the household’s cash flow and net worth. Net worth is a person’s balance sheet obtain by adding all assets under that person’s control minus all household obligations at once.
Corporate finance consists of financial activities related to running a business and its is a department or department that oversees the economic functions of a company. And the main concern of corporate finance is to maximize shareholder value through short-term and long-term financial planning and the implementation of different strategies.
Private financing refers to an alternative method of business financing and That helps a company raise funds because within a limited time frame to avoid financial problems so it shall complete.
This method allows a company that is not list or cannot get financing in these markets. And a private financial plan may also be suitable for a non-profit organization.
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