What is 'Financing'
Financing is the act of providing funds for business activities, making purchases or investing. Financial institutions and banks are in the business of financing as they provide capital to businesses, consumers and investors to help them achieve their goals. The use of financing is vital in any economic system, as it allows companies to purchase products out of their immediate reach.
BREAKING DOWN 'Financing'
There are two main types of financing for companies: debt and equity. Debt must be paid back, but it is often cheaper than raising capital due to tax considerations. Equity does not need to be paid back, but it relinquishes ownership to the shareholder. Both debt and equity have their advantages and disadvantages. Most companies use a combination of both to finance operations.Equity Financing
Equity is another word for ownership. For example, the owner of a grocery store chain needs to grow operations. Instead of debt, the owner would like to sell a 10% stake in the company for $100,000. Companies like equity because the investor bears all the risk; if the business fails, the investor gets nothing. At the same time, giving up equity is giving up control. Equity investors want to have a say in how the company is operated, especially in difficult times. So, in exchange for ownership, an investor gives his money to a company and receives some claim on future earnings. Some investors are happy with growth in the form of share price appreciation; they want the share price to go up. Other investors are looking for principal protection and income in the form of regular dividends.
Debt Financing
Most people are familiar with debt as a form of financing because they have car loans or a mortgages. Debt is also a common form of financing for new businesses. Debt financing must be repaid, and lenders want to be paid a rate of interest in exchange for the use of their money. Some lenders require collateral. For example, assume the owner of the grocery store also decides that she needs a new truck and must take out a loan for $40,000. The truck can serve as collateral against the loan, and the grocery store owner agrees to pay 8% interest to the lender until the loan is paid off in five years. Debt is easier to obtain for small amounts of cash needed for specific assets, especially if the asset can be used as collateral. While debt must be paid back even in difficult times, the company retains ownership and control over business operations.
-
Debt Financing
Debt financing occurs when a firm raises money for working capital ... -
Cost of Capital
Cost of capital is the required return necessary to make a capital ... -
Asset Financing
Using balance sheet assets (such as accounts receivable, short-term ... -
Long-Term Debt To Capitalization ...
A ratio showing the financial leverage of a firm, calculated ... -
Debt Service
The cash that is required for a particular time period to cover ... -
Collateral
Collateral is property or other assets that a borrower offers ...
-
Small Business
Why Equity Financing Is Worth It
When a business takes on an equity partner, it is exposed to a number of advantages that debt financing simply cannot provide. -
Small Business
Choose The Best Way To Fund Your Startup: Are Loans Or Equity Right For You?
Which is better for a startup - debt or equity? Here are the advantages, challenges, and criteria. -
Small Business
Steps to Qualify For a Small Business Loan
Learn steps to qualify for a small business loan such as identifying financing needs, preparing a business plan and getting required documents. -
Personal Finance
What Millennials Should Know About Good and Bad Debt
Can you tell the difference between good and bad debt? -
Investing
Cash Flow Statement: Analyzing Cash Flow From Financing Activities
The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors. -
Small Business
Small Business Loan Vs Line of Credit: How They Differ
Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing. -
Personal Finance
How to Invest When You're Deep in Debt
Debt is one of the biggest obstacles that prevents people from investing - but it shouldn't be. -
Personal Finance
Best 5 Money-Saving Tips to Get out of Debt
Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
-
How is debt 'a relatively cheaper form of finance than equity'?
When financing a company, the cost of obtaining capital comes through debt or equity. Find out which method generally provides ... Read Answer >> -
How does a company choose between debt and equity in its capital structure?
Learn about the benefits and drawbacks of debt and equity financing. Find out how to compare capital structures using cost ... Read Answer >> -
What are the different equity financing options available to companies in the United ...
Learn what equity financing options are available to small, mid-sized and large companies within the United States and understand ... Read Answer >> -
What is the difference between cost of debt capital and cost of equity?
Learn about how the costs of debt and equity capital differ and how to calculate each using interest and tax rates and stock ... Read Answer >> -
What are the main categories of debt?
Learn about the different types of debt available for consumers including secured debt, unsecured debt, revolving debt and ... Read Answer >> -
What is the difference between secured and unsecured debts?
Learn about the differences between secured and unsecured debt — and how banks buffer risks associated with each type of ... Read Answer >>