Finance is not actually new. In fact, it is as ancient as the human life on earth. Finance is a French word which means “the management of money or funds.” It was used by the English during the eighteenth century. There are a lot of activities that are associated with finance including borrowing, budgeting, forecasting, lending, investing, and saving. Therefore, finance is all about the management of funds as well as the methods of obtaining the required funds.
What are the Different Types of Finance?
The two major types of finance are Equity Finance or Debt Finance. However, there are also other types of finance including Personal Finance, Public Finance, Private Finance, and Corporate Finance.
What is Debt Finance?
Typically, debt finance refers to the cash that you obtain for maintaining or running your business. Debt finance has no ownership control to the lender. In other words, the borrower should repay the principal amount as well as the interest rate. Most often, the interest rate will likely depend on the duration, loan amount, inflation rate, and the objective for borrowing this type of finance. There are three types of debt finance. These are the short-term, medium-term, and long-term.
Short-Term Debt Finance
Short-term debt finance includes the loans that are needed for a period of over 1 to 180 days. The purpose of these loans is to cover the shortage of finance as well as occasional or temporary requirements. Generally, short-term finance is needed for your day-to-day business activities including obtaining raw materials or paying the salaries of your employees. The amount of your short-term loan will likely depend on your other sources of income for the repayment. The most common types of short-term debt finance are the lines of credit that you obtain from your suppliers.
Other types of short-term finance include trade credit, bill discounting, credit cards, bank overdraft, small business loans, working capital loans, cash advances from customers, and short-term loans from retail banks.
Medium-Term Debt Finance
Generally, medium-term debt finance includes the loans that are needed for a period of more than 180 to 360 days. The way how these funds are used will likely depend on the type of your business. Repayment of the loan will be taken from the sources of cash flow. Most often, these loans are used by businesses for buying fixed assets, equipment, and the like.
Most often, medium-term debt finance is used by startups or small business owners for accomplishing their fund rotation. This is due to the fact that businesses are required to pay their suppliers for the goods that they need including machinery, equipment, inventories, and the like. Medium-term debt finance can be in the form of lease finance, hire purchase finance, issue of bonds, and medium-term credits from commercial banks.
Long-Term Debt Finance
Long-term debt finance includes the loans that are needed for a period of more than 360 days. Most often, this type of finance is required for purchasing land, plant, restructuring buildings or offices, and others. The interest rate of long-term finance is much better compared to short-term finance. Usually, the repayment duration of long-term debt finance is five, ten or twenty years.
Two of the most popular examples of long-term debt finance are home loans and car loans. Other examples of long-term debt finance include the issuance of bonds, equity shares, preference shares, venture funding, long-term loans from the government, financial services institutions, and funds from investors.
What is Equity Finance?
Equity finance refers to the typical way of increasing the capital for your business by offering or issuing shares of the company. This is one of the major factors that differ equity finance from debt finance. Normally, this type of finance is used for seed funding for new businesses and start-ups. Well-recognized companies usually use this type of finance for adding capital to their business, most especially if they are planning for an expansion.
Generally, equity finance could be in the form of offering or issuing equity shares of the business. Every share represents the owner’s unit for a particular company. For example, if the public investors are offered by a certain business with 10,000 equity shares. If an investor chooses to purchase 1000 equity shares of that business, then it means that he now owns 10% of the company.
What is Public Finance?
Public finance refers to the study of the state’s income and expenditure. It only covers the government’s finances. The extent of public finance incorporates the collection and the allocation of its funds towards the various sectors of state activities. This includes the essential duties or functions of the government. The three classifications of public finance include Public Revenues, Public Expenditure, and Public Debt.
Public Revenues
Public revenues are broad and incorporate all the income and receipts regardless of their source and nature, that are acquired by the government for a certain period of time. Additionally, it also includes the loans obtained by the government. To narrow it down, it only incorporates the income that comes from revenue resources such as prices, taxes, fees, fines, penalties, gifts, and others.
Public Expenditure
Public expenditure refers to the expenses spent by the government for the preservation, maintenance, and welfare of the society, economy, and nation.
Public Debt
Public debt refers to the loans obtained and used as a source of public finance. It carries with it the interest and the repayment to the individuals.
Personal Finance
Personal finance refers to the usage of finance’s principles when it comes to the monetary options of individuals or families. This incorporates the methods in which individuals or families obtain, spend, budget, and save money over a certain period of time, taking into consideration the various financial risks and future life events. Financial position is concentrated on learning what are the available personal resources. This can be done by evaluating the cash flows and net worth of the household. Net worth comprises the balance sheet of the individual which is obtained by adding up all the assets that are controlled by the individual and deducting all the liabilities of the household occasionally.
Corporate Finance
Corporate finance incorporates the financial activities that are involved in operating a corporation. This division or department is the one that handles the financial functions of a business. The major concern of corporate finance is the optimization of shareholder value by applying long-term and short-term financial planning as well as the various implementation of strategies.
Private Finance
Private finance is the alternative option to corporate finance to help a business obtain funds to prevent monetary issues within a restricted time frame. Typically, this methodology can help a business that is not capable of acquiring finance or is not included in the list of a securities exchange. A private financial plan is also ideal for a nonprofit organization.
What are Financial Services?
Financial services are the particular services offered by financial institutions and banks in a financial system. Generally, all activities that are financial in nature are considered financial services. Broadly speaking, financial services could also be referred to as the mobilization and appropriation of savings. Hence, it incorporated all the activities that are included in transforming savings into investment.
The finance industry has a broad coverage of organizations that are involved in handling the inflows and outflows of monetary funds in an economy. Some of these organizations include Asset Management Companies such as merchant bankers, leasing companies, etc., as well as Liability Management Companies such as acceptance houses and discounting houses. It also includes general financial institutions such as credit card companies, consumer finance companies, banks, insurance companies, stock exchanges, as well as other government-sponsored enterprises.
Some examples of financial services include credit rating and loan syndicating, financial and performance guarantees, insurance, installment credit and hire purchases, housing finance, and book building, depository services, brokerage and stock holding, acceptances, discounting and rediscounting of bills, underwriting, portfolio management, and financial consultancy services, factoring, credit card services, leasing, and mutual fund management.
What are the Features of Financial Services?
Just like any other service company, financial services companies will continue to stay in touch with their clients. In this way, they can create products that can fulfill their particular needs.
Financial services are more focused on their clients. They provide financial services depending on the requirements of the clients. For instance, leasing a finance service might not be required by an industrial client. On the other hand, merchant bankers’ services might be required by companies that are issuing/offering new equity shares in the market.
It is a fact that by nature, financial services are intangible. This means, that in a highly competitive world, brand image is extremely significant. The financial institutions that provide financial products and services must have an excellent image and enjoys the confidence of their clients, or else they might not succeed in the industry.
It is essential that the generation of financial services and the distribution of these services should be complementary. In other words, these two functions, which are the generation of innovative financial services and the delivery of such services, should be done simultaneously.
Just like any other kind of service, financial services should also coincide with supply and demand. Services should not be kept. In fact, they should be supplied to the clients whenever they need them.
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