Types of finance in the financial business
Finance in the financial business is a powerful way to get profit. It is used in businesses related to financial institutions, and with those businesses that provide services associated with finance.
Finance is a term for matters regarding the management, creation, and study of money and investments. Specifically, it deals with the questions of how and why an individual, company, or government acquires the money needed – called capital in the company context – and how they spend or invest that money.
There are many different types of finance available to help businesses grow. Some types of finance are short-term and have to be repaid quickly, while others may take years to pay back. The type of finance you need will depend on the size of your business and its growth ambitions, as well as your situation.
The most common types of finance include:
- Assets finance
- Equity finance
- Debt finance
There are also many other types of finance which are discussed below with explanation:
- Hybrid finance
- Corporate Finance
- Public Finance
- International Finance
- Personal Finance
Each of the above types of finance is discussed below with definitions and explanations:
Table of Contents
Assets Finance in the financial business:
This is the type of loan that deals with tangible assets, such as cars or buildings. It can include any other asset that has value. The main goal is to ensure that if you default on the loan, the finance company can take the asset to cover their losses. This category includes:
Hire Purchase (HP)
this is where you pay for items in installments, but do not own them until you have made the final payment. It’s like renting to buy, but with more expensive interest rates.
Personal Contract Plan (PCP)
Personal Contract Plan is similar to the Hire Purchase. But there is a guaranteed future value given at the start of your agreement. If you ever want to sell your car, it should be worth more than it was at the start of your agreement. You then use this amount to settle your remaining debt and purchase a newer car with a PCP deal. It works well if you want to switch cars every few years and not worry about depreciation.
Lease-Purchase (LP)
Lease-Purchase is a hire purchase agreement with an ‘option-to-purchase’ fee added on. This gives you the option to purchase the vehicle at the end of the finance agreement by paying off any outstanding finance and paying the option-to-purchase fee. If you don’t exercise this option, you will have nothing further to pay and will simply return the vehicle.
Debt Finance in the financial business:
Debt finance is a manner of financing where a company or customer is allowed to spend money that has been deposited in their account. Debit finance provides greater flexibility to the customer, as they can use their own money and not borrowed funds. Debit finances often charge a lower rate of interest than standard loans.
Debt finance is a short-term loan from a private individual or institution, generally for working capital. Debt finance is also known as debt capital. Which includes bank overdrafts, trade credit, loans, and mortgages. Long-term debt finance is for purchasing fixed assets. Debt finance involves the lender charging interest on the amount borrowed until it is repaid.
Types of Debt Finance in financial business:
Short-term debt finance
Loan of less than a year from a bank, finance company, or other business. Most financial institutions prefer to lend for longer periods because the cost of processing applications for short-term loans is high relative to the amount of interest that can be charged. Businesses generally use short-term debt finance to pay wages and salaries, purchase materials, etc., while they wait for payment from their customers.
Medium-term debt finance
Loan of one to five years from a bank or other financial institution. This type of borrowing is used by businesses to finance the purchase of relatively expensive and long-lasting fixed assets such as machinery, vehicles, and freehold property.
Long term debt finance
Loan for more than five years from a bank or other financial institution. This type of borrowing is used by businesses to finance the purchase of very expensive and long-lasting fixed assets such as land and buildings, particularly when these are required to operate their business activities.
Equity finance in the financial business
By definition, equity finance is the sale of stock in a company to an investor. If you are an investor, you may purchase stock in a company and become a shareholder. As a shareholder, you possess voting rights but no ownership interest in the physical assets of the company.
If you are a business owner, you may sell stock to investors. This gives you immediate cash but also gives up some voting rights and control to your shareholder.
Equity finance is the process of raising funds through the sale of shares in a company. This can be done privately or publicly and is often used by companies looking to expand their business. Equity finance does not involve any payments to the investor by way of interest or dividends. Instead, investors will expect to make their money through any profit that their shares generate.
Companies generally raise equity finance by issuing equity shares. Each share is an owner’s unit for that specific company. For instance, if the company has issued 10,000 equity shares to public investors. An investor buys 1000 equity shares of that company, which means s/he holds 10% of ownership in the company.
Hybrid finance in the financial business
Hybrid finance is used to achieve a clear goal for a project that requires different types of financing. For example, a company may need to develop a new product but is short on cash. The company could use some debt financing to pay for research and development, but then later use equity financing to help with marketing and manufacturing costs.
Public Finance in the financial business
Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.
Public finances are also closely connected to social equity and issues of income distribution. Government activities can affect income distribution through tax policy, transfer programs such as Social Security, welfare programs, and unemployment insurance, as well as other policies such as minimum wage laws, tariffs, trade restrictions, and immigration quotas. The distributional impact that a particular policy will have depends on who bears its burden and who receives its benefits.
Personal Finance
Individuals often use financial institutions like banks to manage their finances. The bank provides a safe place to store extra cash and offers interest payments to depositors. Individuals also use banks to borrow funds for major purchases such as vehicles and houses. Banks offer loans as well as credit cards to customers who qualify for these services.
In the financial services industry, “personal finance” refers to the advice given to clients who are looking for help with their money management. Personal finance includes the purchasing of financial products for personal reasons, like credit cards, insurance products, or investment products.
Corporate Finance
The corporate finance sector refers to the part of financial management dealing with the planning and controlling of a company’s financial resources. Corporate finance decisions are based on both short-term and long-term objectives. These include decisions about capital budgeting, capital structure, capital budgeting, dividend policy, working capital management, mergers and acquisitions, corporate governance, corporate restructuring, and others. Managers have to make sure that the firm has enough cash flow to meet its daily operational needs while also planning for future investments and financing. The objective is to maximize shareholder value while minimizing risk.
International Finance
International finance describes any financial transaction across national borders. This includes both governmental and non-governmental transactions. International finance is a broad term that includes topics such as foreign direct investment, currency exchange rates, international trade and exchange, multinational corporations, and global business environments.
International finance is also affected by international monetary systems, government regulation, and so on. The following are some of the more common areas within international finance:
- Foreign Exchange Markets
- International Monetary Fund
- Balance of Payments Exchange
- Rates & Currency Fluctuations
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