What does financing mean
Financing is the act and way of providing and sourcing for funds and money for starting or running a business. What does Financing mean, 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 way which is 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 methods of sourcing for funds to run a business organization. Lenders must be paid back in the rate of interest for the exchange for the use of their money to start your business or running your business. In debt financing, the debt must be repaid at agreed and stipulated time. Most people are familiar with debt as everybody borrows 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.
E.g. 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.
READ: What does Finance mean
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 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 decide 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 gets his own share of the profit to the company as dividends if the company has yielded and also increase in value. In companies that have 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 earnings of the company.
Some companies try financing their company in both debt and equity. What does Financing mean in 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 for capital budgeting in financing a business. Some company runs 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.
Vehicle Financing a business has gone a long way over the years and many companies have been liquidated due to payment of debts which is greater than the assets of the company and mismanagement of funds. A company should have good financial management and financial accounting which gives reports of every business transactions and how money is being spent in the company.