What's what in finances: Financing What's what in finances: Financing

What's what in finances: Financing

The processor means of acquiring capital necessary to conduct a business activity. Two of the most common forms of financing are debt financing and equity financing. In debt financing, one borrows money, usually from an institution, with the promise to return the money with interest at some point in the future. This provides capital to the borrower and a profit to the lender. In equity financing, a company sells portions of ownership to those who are interested. Unlike debt financing, equity financing usually raises capital without incurring liabilities, but the risk exists that the company will not raise enough. An alternative to both debt financing and equity financing, especially for startups, is using money from personal savings to pay for activities.

Put differently, financing is a way to leverage the time value of money (TVM) to put future expected money flows to use for projects started today. Financing also takes advantage of the fact that some individuals in an economy will have a surplus of money that they wish to put to work to generate returns, while others demand money to undertake investment (also with the hope of generating returns), creating a market for money.

Any financing obtained may imply an obligation in the future. For example, a bank loan requires the debtor to pay a periodic installment over the next few months or years. Similarly, in the case of shareholder contributions, they may expect to be paid a share of the profits in the form of dividends.

Related Articles

More News

More News