Finance is a process of obtaining the required funds and it is the study of funds management. Finance is the management of money or funds which involves saving, lending, investing, forecasting, borrowing, and budgeting activities. There are two main types of finance such as Debt finance and Equity finance and also there are many other types of finance such as private finance, corporate finance, personal finance, and public finance.
Definition and explanation of Debt finance and its types
Basically, the money that you are obtaining for running or maintaining the business is called debt finance and this debt finance does not offer ownership control for the moneylender where the borrower has to repay the principal amount with the agreed interest rate. Here the interest rate is calculated based on the inflation rate, type of finance, the purpose of borrowing, duration and the loan amount. Debt finance is further divided into three types such as long term debt finance, medium-term debt finance, and short term debt finance.
Loans offered for one to 100 days of a time period is known as short term debt finance and these loans are got for covering the occasional or temporary requirements and a shortage of finance. Also, this type of finance is essential for daily business activities like getting raw materials or paying wages to the suppliers or staff. The lines of credit, short term loans, small business loans, working capital loans, bank overdraft, bill discounting, credit cards, advances from customers and trade credit are the form of short term debt finance.
Loans offered for more than 100 days of a time period is known as medium-term debt finance and this type of finance are borrowed for fixed assets, purchasing equipment, and so on. Medium-term credits from banks, lease finance and hire purchase finance are some of the forms of medium-term debt finance.
Loans offered for more than 1 year of a time period is known as short-term debt finance and these loans are borrowed for restricting buildings or offices, buying land or plant, and so on. The repayment duration of this type of loan is 5 to 20 years.
Definition and explanation of equity finance
Equity finance is a way of raising business capital by offering company shares and this type of finance is applied in well-known companies for business expansion by raising additional capital and each share is the unit of owner of the specific company.