Types of Finance

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Types of Finance:

Presently entrepreneurs, startups, businesses must be aware of all types of finance available in the market. Also, it’s their primary due to analyzing it like, what they can do, which type of financing technique is better to another, and where required funding can be found. So here you can gain enough knowledge about it. What are the two main types of finance? Let us understand in detail:

1. Debt Financing:

Debt financing is essentially cash that you obtain to run or maintain your business. Debt financing does not give the moneylender ownership control, but rather the principal amount must be repaid along with the interest percentage agreed upon. Interest percentage is mostly determined based on duration, inflation rate, amount of loan, and the purpose for which specified type of finance is been used. You can consider debt financing as being divided into three types of finance they are: short-term finance, medium-term finance, and long-term finance.

A. Short-Term Types of Finance:

Loans usually for more than 1 to 180 days of a period are known as short-term types of finance. These are made to cover occasional or temporary requirements and shortages of funds. Short-term financing most commonly applies to cash required for the everyday activities of the business, for example, obtaining raw materials or paying wages to their staff members. The amount to get a short-term credit is mostly dependent on the other source of income for repayment. The most common type of short-term finance is the 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.

B. Medium-Term Types of Finance:

Loans usually required for more than 180 to 365 days of a period are known as medium-term types of finance. It mostly depends on business how the funds are utilized. The business will mostly repay from the cash-flow source of the business. Most such type of finance is chosen by the business to buy fixed assets, equipment’s and so forth. 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. For example: 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.

C. Long-Term Types of Finance:

Loans usually required for more than 365 days of the period are known as a long-term type of finance. Such financing for the most part is required for buying the land, plant, restructuring buildings or offices, etc. for your business. Normally long-term types of financing options have a better rate of interest when compare to short-term financing. Such types of finance are usually having a repayment duration of 5, 10, or 20 years of period. For example, 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.

2. 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 between equity financing from debt financing. The equity financing option is ordinarily used for seed funding for new businesses 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. For example: if the organization has offered 100,000 equity stocks to public investors. You being the investor buys 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 a higher price to other investors to gain profits from them. 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 ownership along with dividend and voting rights.
  • A company can also offer equity stocks as ownership with neither dividend nor voting rights.
  • A company can offer preferred stocks as ownership with no voting rights but they will get dividends on stocks.




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