types of financing

Top 2 major types of Financing

There are 2 major types of Financing: Debt financing and Equity financing. Financing is the basic requirement of every business, brand, company, and individual marketing industry. Actually, financing is a process of providing funds for businesses, making purchases, and investing. The use of finances holds key significance in any business. The commercial banks available in the market are helping businesses by providing capital.

Financing: A vast Market

Financing is a vast market. It allows the house with the amount ready to invest to generate returns to investors. And on the other hand, it also creates opportunities for those looking for funds to retain their interests in the market. In this way, financing actually builds a market for the money.

Types of Financing

There are two major types of financing. These financing types control almost all of the money market. the major types of financing include debt and equity. Debt is a type of finance that has to be paid back and it comes with a lot of drawbacks. Apart from various drawbacks of debt – the debt must be paid back with interest – has certain benefits too.

While debt must be returned with an added amount of interest, equity is a type of financing that considered to be the most effective way to coin money. Equity does not need to be paid back, in fact, it is to give up ownership stakes to the stakeholders.

1. Equity financing

Equity financing is a highly growing type of financing because it encourages investors to carve for new opportunities and let the businesses grow stronger. For example, a famous food chain wishes to expand its business. So, instead of selling the brand or building more hotels by their own investment, the chain invites investors. When the investors show their interest, the chain will negotiate and set a deal. Now, the chain will get its share but all the failure is upon the investor.

One of the biggest benefits of equity financing is that you don’t have to pay monthly payments. In this way, there is always more liquid cash hand to spend on operating expenses.

 As equity financing has one of the biggest advantages in the market, it also carries one of the biggest disadvantages – you have to consult your investors before making any crucial decision.

Now let’s move towards the second type of financing, the debt financing. Debt financing, also termed as commercial bank loans, is a method used to stabilize businesses with the help of loans. These loans are to be repaid with interests.

2. Debt financing

Debt financing requires the length of the loan, security, interest rates, and other terms to be explicitly decided in advance. All these terms depend on where the loan is to be used.

There are 3 types of debt financing when it comes to time frame: the short – term financing, medium to long term financing, and real estate financing.

To cover temporary or seasonal needs for inventory, short – term (30 – 180 days) loans are made. This is the most common type of financing for already established businesses. But these are the most difficult to draw for newly established businesses.

Time loans are usually obtained by seasonal businesses that hit the market on a seasonal basis. But it must be considered carefully to repay the loan in time for better future prospects.

To sum up, financing is the backbone of established and newly maintained businesses. The two major types of financing are Equity financing and Debt financing. Debt financing includes short – term loans, medium, and long term loans, and real estate financing.

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