Finance is a broad term basically used for two concepts; the study of to how effectively manage the money and the acquisition of money. Previously finance was only divided into three categories that are Corporate Finance, Public Finance and Personal finance but recently it is divided into five categories as Corporate Finance, Public Finance, Personal Finance, Social Finance and Behavioral Finance.
Sources of Finance
Financing is required or needed to start the business and to run it profitably. There are two main type of Sources of Finance:
- Equity Financing
- Debt Financing
Equity financing means to exchange the certain portion or part of ownership of the business for the sake of investment in the business. The ownership stake resulting from an equity investment allows the investor to share in the company’s proï¬ts. Equity refer to permanent investment in the company and the amount invested by the investor is not refundable or is not repaid by the company later. Equity holder in the company can be in the form of memberships, shareholders like owners of common stock and preferred stock.
The company mainly issue three type of stocks;
- Common Stock
- Preferred Stock
- Deffered Stock
Number first is common stock in which voting rights are given to the stock holder and number second is Preferred stock in which no voting rights are given to the stock holder and the third type is deferred stock; Deferred stock issued by the companies are reserved for the promoters of the company and fixed dividend is given upon them. In case of bankruptcy of the company; claims of preferred and deferred shareholders are cleared firstly and then of common stock holders.
Sources of Equity Financing
To finance yourself the first option you have is your own savings and equity. Personal savings include your deposits, early retirement funds and profit sharing etc .
Life Insurance Policies
A standard feature of many life insurance policies is the owner’s ability to borrow against the cash value of the policy. And the money provided against the cash value of the policy can be used by the owner to finance their business.
Friends and Relatives
To finance yourself you can also look up for your parents and friends and family; they should finance you and in return will get some portion of the profit every month or can get their money back along with some interest or markup.
Venture capital refers to the financing coming from the companies or individuals who finance or invest in the new businesses.
Other Sources of Equity Financing
- Angel Investor
- Government Grants
- Equity Offerings
- Initial Public Offerings
Debt financing refers to borrowing money from creditors with the intention of repaying that money back along with certain markup or interest. The benefit in debt financing for creditors is the amount or money given in the form of markup or interest on the lend amount. Debt Financing Can be secured or unsecured as well. The secured Debt Financing have Collateral while on the other hand the unsecured debt have no Collateral and the Lender feels unsecured while lending the money as compare to the secured Debt where the lender feels secured while lending for the repayment of money lend.
Debt financing can be short term like for 2 to 3 years and short term financing are for recent operations or current activities While the Long term debt financing is for more than 3 years like for 5 or 7 years like debt financing for buildings or plants.
Sources of Debt Financing
Bonds are usually used for raising the funds of the company. Bonds are the secured form of the debt financing because at the maturity the amount is repaid to the investor along with certain markup or interest rate. Bonds are the long-term debt financing instruments which are tradable as well.
Commercial Finance Companies
There are certain financial companies or institute who help the owners in financing their businesses. These companies may be more willing to rely on the quality of the collateral to repay the loan than the track record or profit projections of your business
Other Debt Financing Sources
- Government Programs
- Commercial Lenders
- Friends and Relatives
November 09, 2018