Finances is the act and way of providing and sourcing for funds and money for starting or running a business. Financing can also be defined as the act of providing capital for business. Capital can be any durable goods or money or wealth that can be used in starting a business. Financing takes two ways which are debt and equity.
Debts are funds that can be refundable while equity cannot be refunded but rather takes a path in which funds or capital are distributed into a business or corporations by shareholders for the purpose of getting a maximum profit when the corporation increase in value.
Debt financing is one of the most familiar method of sourcing for funds to run a business organization. Lenders must be paid back in rate of interest for the exchange for the use of their money to start your business or running your business. In debt financing, debt must be repaid at agreed and stipulated time. Most people are familiar with debt as everybody borrow or lend money or any other thing daily.
They also understand that debt must always be repaid. Some lenders collect their money in installment like in the case of car lenders. They provide you with their car and you pay them a specific amount of money daily till the amount for the vehicle is complete. These people gain more on the vehicle as the real amount or the worth of the car is passed as you provide them their installments daily or weekly or annually.
For example, a Toyota vehicle that is worth $900000 but was supposed to be sold at the rate of $1M, is been given out to a man on installments with the agreement of paying $40000 monthly. At the end of the year if he is able to pay the money monthly, the money with the lender would be $1.2M which makes him to have $200000 apart from the profit which he is supposed to have on the vehicle. The lender also use the over profit acquired for financing his business by trying to get more cars
Equity financing gives everyone equal right in the business. Investors buy shares from a company and wait for the company to increase in value and they have their profits for the investments. The reward is called dividends. They all run the affairs of the corporation together or they have someone in charge of the business on their behalf. To start an equity financing, a business owner might decides to sell 10% of the business stocks to investors for the purpose of using the money for financing the business. The investors might get nothing if the business does not yield any profit. The investor get his own share of the profit to the company as dividends if the company has yield and also increase in value. In companies that has equity financing, the investors bear all the risk.
An investor always wants to have his opinion known in the corporation and in returns operate the corporation together with the original owner of the business and also put his money in the running of the business. He claims some percentage of the future earning of the company.
Some companies try financing their company in both debt and equity. Financing a company, capital budgeting is usually put in place to know the cost of capital. Cost of capital is the necessary and required amount of money or funds or capital that are necessary in capital budgeting in financing a business. Some company run their business basically on debts while some on equity and some practice both.
They sell their shares to investors and at the same time take loans from external sources. At the end when the profit is yielded, the debt is paid as it’s a liability. From this, the net worth of the company is known. The investors share the money according to the percentage of shares bought from the company.
Financing a business has gone a long way over the years and many company has been liquidated due to payment of debts which is greater than the assets of the company and mismanagement of funds. A company should have a good financial management and financial accounting which gives reports of every business transactions and how money are being spent in the company.