Financing is quite an elaborated topic and for understanding in depth a person needs to understand types of financing and advantages related to such financing.
Understanding the financing:-
There are namely two types of financing in the current era which are:-
- Debt Financing
- Equity Financing
Debt Financing
This type of financing is relatively considered with loan as the word “debt” means borrowing or taking loan. Under this type of financing people take loans from banks or other commercial institutions with a promise of repaying it within the certain specified time period along with some interest. Most of the people are quite familiar with this system as a lot of people are already undergoing some sort of debt financing in their life in the manner of Car or house loans or mortgages of property.
Debt financing can be of different types. Some people mortgage for giving a loan, some need collateral such as keeping some part of their property as collateral so in case the loan taker is unable to pay back the loan amount the lender can get his loan amount repaid to themselves by selling off the collateral.
It is necessary for a person to repay the financing received through debt financing and also it is easier for people to obtain the debt financing for small amounts and also it is easy to get the debt financing against collateral. One of the major issues of debt financing is that even if a person is going through a tough time then also they have to work towards paying off such financing. Although debt financing is an easy and good way to get financing.
Equity Financing:-
Equity financing is completely different from debt financing in this type of financing the company make stakes of his total capital by selling it in the market in the form of equity for generating funds that means the ownership rights of the company is been given to other people who is buying the shares and they have right to receive the profits if the company is gaining and also they will receive loss if the company is getting losses. Equity is being referred with ownership in a company.
For Example: A company known as ABC limited wants to expand their business by opening new segment which needs new machineries and all for which the company require funds and for the purpose of this company would like to sell their stake in the market & for that purpose company plans to sell 10% of their stake in the market which costs around $1,00,000 by offering an initial public offering to the public dividing into equity shares.
This type of financing is done as this reduces the burden on the company owner as through this he made various owners and the person investing in the business will be equally liable for the profits and losses shared in the business.
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