Finance is a common word used for many centuries now. It describes the use of money and how one can use or manage money properly. Words like savings, banking, loans, investment, and budgeting are also terms that relate to finance.
The question is: what are the types of finance?
The role finance plays in our everyday life is beyond the ordinary, as no one on the face of the planet can live appropriately without funds. Thus, we shall be looking at what are the types of finance. Finance has three main types that we can easily relate to in our lives. They are personal finance, public or government finance, and corporate finance, which apply mostly to the business world.
Keep reading for more information!
Types Of Finance
Everyone, as we know, needs finance and also interacts with finance daily, from the house to the office, and even the governments interact with finance. In this section, we will be looking at the various types of finance mentioned above.
Personal Finance is a term that refers to the way an individual plans for his finance, that is the way an individual spends his or her money on things, and it also includes savings. As far as personal finance is involved, it covers all the spending, savings, or investment of an individual.
Some of the spendings can be for an educational purpose such as college or graduate school. It could also be for a car purchase or even housing, and the investment planning may be getting insurance in the various areas, including life insurance. Savings, which is very popular today, can be with the bank or even a retirement plan.
According to the FPSB, there is a way an individual should treat finance, and these steps will show you how.
Step 1: Get an insurance policy that will help you deal with accidents or things that may occur without your knowledge.
Step 2: When you are working, you should understand the tax policy in your country and see how you can manage your money around it.
Step 3: You must realize the effects of receiving loans or credit on your finance, especially the ones that involve payment of accrued interest.
Step 4: You should put together a plan for big projects in your life, such as education, car, or even buying a house, and prepare a suitable saving plan towards it.
Step 5: You must get a checking account or a savings account as it will help you to keep your money safe and manage your finance properly.
Step 6: Finally, a plan for retirement. The best time to plan for retirement is when you are still young. Many retirement plans in various banks will offer you long term saving platforms for this purpose.
Government or Public Finance
The public or government finance mostly relates to countries, states, and even provinces. It tells us all that concerns the finance or revenues generated in the country, expenditure, which is the spending of the government and debt of a country or state, and how the public officers are managing it.
In public finance, the generation of funds is mostly from taxes and also borrowing from the bank. They mainly involve the finance they generate on long term investments in the states. One of the ways they spend money from the public purse is when they pay the government or public workers their wages or when they are building a bridge in the city or even organizing a carnival for the country or state in other to give the citizens a treat.
The public finance takes things like economic stability seriously and even resource allocation. The government finance or public finance concerns itself with identifying the expenditure needed by the public or the people, the way to raise funds for proper circulation for the people, the budget process, and how they can get around it. Lastly, debt giving or you can call it Municipal bond, which the government uses to generate money for its projects like roads, school, and so on.
When the word corporate finance comes to mind, it drives business, company, and corporation to the mind of the person. Corporate finance deals with the income or funds of a business and also the capital structure of that business. It also includes the way the business owner manages the company to produce more value to the business name and the market at large.
One crucial factor that you cannot ignore when it comes to corporate finance is the capital structure, which entails all the ways you can raise funds for the business and also increase the value of that business. Two ways relate to capital structure. These two ways are Debts Capital or Finance and Equity capital or Finance.
Debt Capital or Finance
One popular way of raising funds for a business is through taking of loans from banks or agencies that set up for this kind of project. Debt finance is the process of taking a loan or borrowing funds from the banks or agency or better still, generally known as a lender, to develop your business.
In this manner of financing a business venture, the borrower will repay the loan at a particular time and with an interest rate on it. The lender or the bank does not have ownership of the business. They cannot do anything in the company even though the money or fund is from them.
However, the terms relating to interest rate and the time of payback apply strictly, as late payment may incur penalties like extra interest or even loss of ownership of the collateral. In as much as the debt finance gives you the full control of your business, it is also good you know that one side effect of this kind of business financing is that most times, it is challenging to grow the business.
With the regular repayment of the loan you have incurred, and with money leaving the firm like that, it is evident that the payments would affect the growth of the business, especially when the debt burden is very weighty.
Equity Capital or Finance
Another way you can raise funds for your business is through the selling of shares. Equity capital or finance refers to the process in which a company or business sells or issues shares to either third party investors or even stakeholders for a particular percentage of the company or business.
The word Equity means ownership in business terminology. Let’s have a practical example to explain the word. In a business entity known as Kelp Plc, the management of Kelp Plc needs to generate money for the company. Instead of going into debt, they put up 5% of the business for sale for about $2 million, which is the money they need to expand.
Once an investor or even an existing stakeholder can pay that sum, he or she owns 5% of the business, which includes 5% of everything that comes out from the company in terms of profit and the rest.
One side effect to the equity acquisition, on the side of the investors, is that if the business fails, he gets nothing from it. For the owner of the company, one side effect he gets is that he cannot take any decision on his own as he needs to consult other investors before taking any action.
Properties of Corporate Finance
A Capital or Financing option must have some essential features that will help in the fund’s management and also risk management. These properties are:
- Capital Budgeting, which will cover the kind of project the company is about to undertake.
- Checking the right business techniques to give the business the actual value it needs.
- Knowing how to fund the business or project is also essential and should clear enough.
- Knowing what to do with excess money generated from the company should also be put into consideration, as the sharing of it could be among shareholders or used as an investment for the long term.
- Risk Assessment and management are also critical. In the same view, the business must also consider tax.
Ways You Can Raise Funds For Corporate Purposes
When it comes to generating funds to run a business, there are many approaches one can take to get the required result. As we have highlighted previously, we can make the debt approach where we can borrow money for the business or can use the equity approach whereby we sell parts or shares of the company for a specific amount,
However, in this section, we will look at practical ways you can raise funds without going into debt or equity sales. These methods are:
You can raise money for your company or business your money over time. It could be money that you saved, or it could also be money gotten from the sales of a property of yours, which will be useful in funding your business and its operations.
It is clear that once the government sees a possibility of your business succeeding, they tend to fund it as it will give an excellent chance to the country’s economy. It is what most governments are into; they offer grants to small businesses that can diversify the country’s economy.
Family and Friends:
Family and friends are one way you can get money without talking about debt and equity sales, as they are willing to help you bring your dreams to life. Your family and friends support you by going as far as funding that business just to see you happy. In some rare cases, they would want to have a share of the company or market as time goes on, but most times, it is on a mutual understanding.
We talked about grants when we were talking about how the government could be a source of funding for your business. However, not only can the government give a grant, which is free money without debt or equity fear. Many agencies today are in existence that funds small business ideas, ranging from different sectors. The owners of these agencies could be billionaires, so this is just a way of giving back to the same community that made them very rich.
In the business world, every individual or business should have a financial instrument so it could thrive better. The financial instrument consists of contracts that reflect the monetary transactions between two parties. The financial instrument can be bonds or shares and usually useful for many purposes. It could be helpful either for investment or lending purposes.
The financial instrument is divisible into two main types, which are the cash instrument and the derivative instrument.
What the market can interact with directly is what we refer to as the cash instrument. For example, when it comes to depositing and loans, the receiver of the loan and the lender will agree. There must be an agreement on the transfer of money from one party to another. That agreement is what we can refer to as the cash instrument. One can quickly transfer the cash instrument from one party to another party.
The derivative instrument is a financial instrument whereby the worth of a particular instrument comes from the value of other underlying entities. It could be assets, indexes, or even interest rates.
Also, there is another classification of financial instruments. It also has two main categories. They are debt and equity.
It is a class of financial instrument that shows the loan the investor or the third party made on the business or the entity as the case may be. This class of financial instruments includes bonds, options, bond futures, and interest rate swaps.
It is a class of financial instrument that shows the ownership of the business or entity based on the share or equity of the investor or the third party. They use stock in running a financial exchange under this category.
Another name for the microfinance is microcredit. It is a system set up for persons that cannot afford or get hold of financial service. Typically, the microfinance is for the unemployed and relatively low-income earners, as they may not afford the cost of getting a financial service.
The banks have also carved out sections that help in microfinance and things like a savings account and even training. Although not all banks are doing this, microfinance is basically to grant loans or other services like savings, insurance, and also a credit to small businesses or people that cannot afford the traditional way of financial servicing.
Various institutes could house the microfinance. Starting from banks, as we earlier said, to government agencies and even NGOs (Non-Governmental Organizations), they can run this service.
Some of the benefits of the microfinance can be;
- It gives low-income earners the ability to live better and also provide for the family.
- It gives you credit and sometimes loans with no collateral and a flexible payment plan.
- It offers financial services to those persons that cannot afford it in society.
- The microfinance aids in supporting the education of children through the various product and services they offer to the poor and less privileged.
- It also helps and gives the poor a sense of future planning and investments, as they can meet all their present needs. With this, the more money they get, the more they tend to invest in the future.
- They microfinance also helps in creating jobs, because once they could serve a particular entrepreneur in a country that is developing, that entrepreneur tends to grow and create jobs for the people and that community or state, hence helping the economy grow.
- The microfinance also allows people to save money for the future and other investments.
Finance, on its own, is an important topic to cover as it cuts across virtually everything in life, from accounting to economics, to business and even our day-to-day living. Having good financial knowledge is paramount to our survival. In this present age, if you lack the right financial education, it might lead to abject poverty even if you are worth $1 billion currently.
Financial knowledge gives you the ability to manage and know the risk that relates to action once you take that particular action that pertains to your finance. In looking at what are the types of finance, we understand that finance divides into three that enables it to relate with virtually everybody and everything in the world.
They are personal finance, public or government finance, and corporate finance. Whether you are just an individual or you own a business, or you are even in the government, the good thing is that if you do not have financial knowledge, there are bodies out there that would help you manage your finances. They mostly refer to them as financial experts. These experts help you to figure out all the technical issues of financial management.