Types of Finance
Presently entrepreneur, startups, businesses must be aware of all types of finance available in the market. Also it’s their primary due to analyse 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:
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.
Short-Term Types of Finance:
Loans usually for more than 1 to 180 days of period is known as short-term types of finance. This are made to cover occasional or temporary requirements and shortage 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 dependably on the other source of income for repayment. Most common type of short-term finance is 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.
Medium-Term Types of Finance:
Loans usually required for more than 180 to 365 days of period is 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. Mostly such type of finance are chosen by 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.
Long-Term Types of Finance:
Loans usually required for more than 365 days of period is known as long-term type of finance. Such financing for the most part is required for buying land, plant, restructuring buildings or offices, etc. for your business. Normally long-term types of financing options have better rate of interest when compare to short-term financing. Such type of finance are usually having 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.