You cannot set up a business effectively without knowing how finance operates and the types of finance. Understanding how money management helps small and big companies coordinate financing activities, gets the most returns on different investments, bankruptcy, and limits risks.
Finance is a wide subject, and it can get overwhelming along the way. We have covered the essential information you need to know about how finance works for companies and help to grasp the basics.
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What is Finance?
Firstly, companies need to understand that finance means more than money. While money is the legal tender used for transaction settlements, finance refers to asset management and allocation resources.
Finance cuts across multiple activities like developing a cash flow forecast for your business, creating budget and finance models, and keeping money in a high interest saving account.
Types of Finance
Presently businesses, companies, startups, entrepreneurs must be aware of all the types of finance available in the market. Also, it is their primary duty to analyse it to see what they can do, where required funding can be found, and which type of financing technique is better to another. Here, are some types of financing discussed below;
- Debit financing
- Short term type of finance
- Medium term type of finance
- Long term type of finance
2) Equity Financing
- Seed Investors(Angel Investors)
- IPOs(Initial public offerings)
- Venture Capital Firms
- Crowdfunding Platforms
Debit financing is essentially cash that one obtains to maintain or run his/her business. Debt financing does not give the money giver ownership to control, but rather the actual amount must be repaid along with the interest percentage agreed upon.
In debit financing, interest percentage is mostly determined based on duration, inflation rate, amount of loan and the purpose for which specific type of finance is used. You can consider debt financing as being divided into three types of finance: short-term finance, medium-term finance and long-term finance.
Short-Term Types of Finance
Loans taken for more than 1 to 180 days of period are termed as short term types of finance. These are made to cover temporary and occasional requirements and shortage of funds. Short term financing commonly applies to cash required for everyday activity. Below are some of the types of short-term finance:
- Advances from customers
- Bank overdraft
- Working capital loans
- Small business loans
- Trade credit
- Bill discounting
- Credit cards
Medium Term Types of Finance
Loans usually required for more than 180 to 365 days of period are termed as medium-term types of finance. It actually depends on the business on how the funds are efficiently utilised. The business will actually pay back from the cash-flow source of the business. Mostly such types of finance are chosen by businesses to buy equipment, fixed assets and so forth. Following are some of the types of the types medium term finance;
- Issue of debenture/bonds
- Lease finance
- Medium term loans from commercial banks
- Hire purchase finance
Long Term Types of Finance
Loans usually required for more than 365 days of period are termed as long-term types of finance. Long term type of financing for the most part is required for buying land, plant, restructuring buildings or offices, etc. for your business. Following are some the types of long term types of finance;
- Venture funding or finance from investors
- Issue of equity shares
- Issue of debentures
- Long term loans from financial institutions, government, and investment from bank
- Issue of preference shares
Equity financing is a typical route for businesses to raise capital by offering or issuing shares of their company. This is a major difference between equity financing from debt financing. Equity financing option is usually used for nut funding for new companies and start-ups, whereas raising additional capital for a business to expand for well-known companies.
Equity financing is commonly raised by giving equity stocks of the business. Basically, any stock is a form of possession for that particular organisation. For example;
- A company can offer preferred stocks as an ownership with no voting rights but they will get dividends on stocks.
- A company can also offer equity stocks as and with possession neither dividend nor voting rights.
- A company can decide to offer equity stocks as a possession along with dividend and voting rights.
Seed Investors(Angel Investors)
In every case, the amount of money invested is less than $0.5 million. This kind of equity financing consists of investors who are close friends of the business’s founders or owners or relative family members or In addition, rich persons or groups are referred to as “angel investors” as well. Angel investors will not be involved in the day-to-day running of a company’s management.
IPOs(Initial public offerings)
An initial public offering (IPO) is a method of giving capital to companies that are more established (IPO). The initial public offering (IPO) allows businesses to raise cash by selling their stock to the general public for trading on the stock exchange markets.
Venture capital firms
Venture capital companies are a collection of investors that make investments in enterprises with the intention to develop at a quick pace and will eventually be listed on stock exchange markets. When compared to angel investors, they make greater investments in firms and get a huge interest in the company as a result of their efforts. A venture capitalist is a person who makes investments in other companies that are worth more than $1 million. Another term for funding private equity financing .
This kind of equity financing consists of huge groups of angel investors that provide capital to start-up and small- to medium-sized enterprises. Crowdfund investment might be as little as $3,000 per investor, depending on the size of the fund.
It is clear to establish an online crowdfunding “campaign” using one of the crowdfunding websites to raise funds for this sort of fundraising. Crowdfunding systems enable a large number of people from the general public to invest sums of money in a firm.
If you are managing an organisation or you are an owner of a company then it becomes your primary goal to gain knowledge on types of finance. Without finance a company cannot run its operations. It would then be easy for you to select the right types of financing option which will best suit your situation.