What are the Two Main Types of Finance - Types of Financing - Wikipedia of Finance

Top 2 Key – Types of Financing / Types of Finance

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The role of finance is very crucial. It is the backbone of every activity. For example: suppose you’ve to purchase a car, you’ll start your planning only if your finances allow you. But there’s a huge difference between amount of capital required for purchasing a car and sanctioned by selecting different types of finance.

What are the two main types of finance? There are mainly two types of financing. Broadly, we divide them into debt finance and equity finance. We further categorize these into various types such as short-term, medium-term, and long-term. There are various options available for financing based on type of finance you required.

Top 2 – Key Types of Financing / Finance

Presently entrepreneur, startups, businesses must be aware of all types of finance available in the market. They primarily analyze it to determine what they can do, which type of financing technique is better than another, and where they can find required funding. So here you can gain enough knowledge about it. What are the two main types of finance? Let us understand in detail:

Debt Financing

It is essentially cash that you obtain to run or maintain your business. The moneylender does not gain ownership control through debt financing; instead, the borrower must repay the principal amount along with the agreed-upon interest percentage.

Interest percentage mostly depends on duration, inflation rate, loan amount, and the purpose for which a specified type of finance is being used. Debt financing can be divided into three types: short-term finance, medium-term finance, and long-term finance.

Short-Term Types of Finance

Loans usually for more than 1 to 180 days of period is known as short-term types of finance. This are made to cover occasional or temporary requirements and shortage of funds. Short-term financing most commonly applies to cash required for the everyday activities of the business. Example of short-term types of finance: obtaining raw materials or paying wages to their staff members. The amount to get a short-term credit is mostly dependably on the other source of income for repayment. Most common type of short-term finance is line of credit from their suppliers. Following are some of the types of short-term finance:

  • Credit Cards.
  • Trade Credit.
  • Bank Overdraft.
  • Bill Discounting.
  • Small Business Loans.
  • Working Capital Loans.
  • Advances from customers.
  • Short-term loans from Retail Banks.

Medium-Term Types of Finance

Medium-term types of finance refer to loans that typically span from 180 to 365 days. Businesses primarily determine the utilization of these funds. Repayment usually stems from the business’s cash-flow sources. This type of finance is often selected by businesses for acquiring fixed assets, equipment, and similar resources.

Many times it is been observed that such types of financing are frequently used by startups or small business owners to fulfill the rotation of funds. As new businesses have to pay upfront to suppliers for all the required goods. Example of medium-term types of finance: buying machinery, equipment, inventories etc. Following are some of the types of medium-term finance:

  • Lease Finance.
  • Hire Purchase Finance.
  • Issue of Debenture / Bonds.
  • Medium-term loans from Commercial Banks.

Long-Term Types of Finance

Finance that typically spans a period longer than 365 days is termed long-term financing. This type of financing is primarily necessary for acquiring land, plants, restructuring buildings, or offices for your business.

Normally long-term types of financing options have better rate of interest when compare to short-term financing. Such type of finance are usually having repayment duration of 5, 10 or 20 years of period. Example of long-term type of finance: Home loans or Car loans are categories as types long-term of finance. Following are some of the types of long-term finance:

  • Issue of Equity Shares.
  • Issue of Preference Shares.
  • Issue of Debenture / Bonds.
  • Venture Funding or Finance from Investors.
  • Long-Term Loans from Government, Investment Banks or Financial Services Institutions.

Equity Financing

Equity financing is a typical route for businesses to raise capital by offering or issues shares of their company. This is a major difference of equity financing from debt financing. Equity financing option is ordinarily used for seed funding for new business and start-ups. Whereas raising additional capital for a business to expand for well-known companies.

Equity financing is commonly raised by offering equity stocks of the business. Typically each stock is a unit of ownership for that particular organization.

Example of equity type of financing: if the organization has offered 100,000 equity stocks to public investors. You being the investor buy 10,000 equity stocks of that company, which means that you hold 10% of ownership in that company.

Those who hold stocks of a company are known as shareholders. Shareholder gets ownership, dividend and voting rights in a company. Shareholders can sell their stocks at the higher price to other investors to gain profits from it. Usually large companies have various classes of equity stocks when offered to public investors. For example:

  • A company can decide to offer equity stocks as an ownership along with dividend and voting rights.
  • A company can also offer equity stocks as an ownership with neither dividend nor voting rights.
  • A company can offer preferred stocks as an ownership with no voting rights but they will get dividend on stocks.

Seed Investors (Angel Investors)

In most cases, the amount of money invested by such investors is less than $0.5 million. This kind of equity financing consists of investors who are typically family members or close friends of the business’s founders or owners.

Additionally, wealthy individuals or groups of affluent persons who provide financial assistance to enterprises are also referred to as “angel investors”. An angel investor does not involve themselves in the day-to-day operations of a company’s management.

IPOs (Initial public offerings)

An initial public offering (IPO) is a method of raising capital for 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 exchanges.

Venture Capital Firms

In the business world, venture capital companies invest in enterprises they believe will develop quickly and eventually list on stock markets. When compared to angel investors, they make greater investments in firms and earn a larger interest in the company as a result of their efforts. A venture capitalist is a person who makes investments in companies that are worth more than $1 million. Private equity financing is another term for this form of funding.

Crowdfunding Platforms

Huge groups of angel investors provide capital to start-up and small- to medium-sized enterprises through this kind of equity financing. A crowdfund investment might be as little as $1,000 per investor, depending on the size of the fund.

It is possible 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 small sums of money in a firm.

Conclusion

If you are an owner of a company or you are managing organization finance then it became your primary goal to take knowledge on types of finance. Without finance a company cannot run its business operations. Also there will be lot of times where you will require funds for your organizational activities. It would then be easy for you to select a right types of financing option which will best suit your situation.

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