Some individuals and companies have all the necessary ingredients for a successful business. But in most cases, they will lack one important ingredient: cash. Funding or Financing provides these entities the chance to come up with funds to forward their business enterprises.
Funding or Finance addresses the ways in which individual, organizations, or business’ raise and use financial resources for their needs.
Finance is the branch of economics that is concerned with providing funds to individuals, businesses, and governments. It also allows these entities to use credit instead of cash to purchase goods and invest in projects.
For example, an individual can take out a loan from a bank to buy a home or a car. An industrial firm can raise money through investors to build a new factory or to expand their operations. Governments can issue bonds to raise money for state projects and budgets.
In the economy, finance plays a vital role in the industrialization and expansion of trade and wealth. Banks, credit unions, and other financial institutions provide credit help put money to work by directing funds from savers to borrowers.
Since the savers do not yet need their money, and have no intention of investing in any profitable ventures, banks use lend these funds to entities that have an investment need. As the entity that borrows pays back what it has been loaned, it also pays interest, part of which goes to the savers that own the funds in the first place.
This cycle of borrowing, earning, and repaying spurs economic growth and industrialization. Today’s fastest growing economies all have these financial instruments in place to finance that growth.
The stock market is another means of funding. When a corporation desires to expand its operations or to build new projects, it may raise funds through securities. Securities are instruments of finance that include stocks and bonds.
Stocks are certificates of partial ownership of company, so stockholders partly own the company they hold stock in. A corporation may offer stocks to the public for sale to generate funds.
In return, these investors will gain partial ownership of the corporation, or equity and dividends of the profit. The corporation may then use the funds for its projects.
When the corporation earns enough, they may opt to buy back the stocks from the stockholders. The stockholders earn profits when a corporation grows enough that demand for its stock increases. This demand increases the selling price for stocks.
Bonds are, in a way, loans that the corporation or entity promise to pay back after a set period of time. They, like stocks, are a viable source of capitalization or funding. And unlike stocks, bonds have a fixed rate of interest, or coupon.
Its price does not fluctuate due to supply or demand. Only currency value and fluctuating interest rates have an effect of this type of debt instrument.
Many aspects of finance are studied individually. Corporate finance centers on how businesses can best raise and spend their funds. Public finance focuses on the financial role of federal, state, and local governments.
With such funding instruments available, it comes as no surprise that it has become easier for those who desire to put up businesses or expand existing ones to get hold of the financial means to do so. In today’s business world, paying attention to the funding schemes available to an entity may dictate whether it succeeds or not.
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James Monahan is the owner and Senior Editor of
FundingReview.com and writes expert
articles about funding.
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