The topic “finance meaning and the types of finance” will be extensively discuss in this article. This is because small businesses need to understand that finance means more than money. While money is a legal tender used for transaction settlements, finance refers to asset allocation and management of monetary resources.
Finance meaning and the types of finance? Finance involves multiple activities like developing a cash flow forecast for your business, keeping money in a high-interest savings account, and creating budgets and financial models. One of the types of finance is the public finance which deals with the allocation of resources to meet the set budgets for government entities. This type of finance is responsible for the scrutiny of the meaning and effects of financial policies implemented by the government. The sector examines the effects and results of the application of taxation and the expenditures of all economic agents and the overall economy.
Finance Meaning and the Types of Finance
There are six major types of finance, they include:
- Debt finance
- Equity finance
- Corporate finance
- Public finance
- Private finance
- Personal finance
1. Debt Finance
This type of finance refers to the borrowing of money to either run a business or for personal reasons. The principal amount must be paid back according to a pre-arranged interest rate and can be classified into short-term, midterm, and long-term debt.
Debt financing is what happens when a business borrows money in order to operate, rather than raising money from investors—which is called equity financing. Examples of debt financing include: trade credit, capital loans, credit cards, loans for small businesses, traditional bank loans, personal loans, loans from family or friends, government loans, peer-to-peer loans, home equity loans, lines of credit, equipment loans, real estate loans etc.
2. Equity Finance
Equity financing involves selling a stake in your business in return for a cash investment. Unlike a loan, equity finance doesn’t carry a repayment obligation. Instead, investors buy shares in the company in order to make money through dividends (a share of the profits) or by eventually selling their shares.
Equity finance is also a method of raising fresh capital by selling shares of a company to public, institutional investors, or financial institutions. The people who buy shares are referred to as shareholders of the company because they have received ownership interest in the company.
They provide the company with much needed capital to sustain business in exchange of shares or ownership in the company. A start-up might need various rounds of equity financing to meet liquidity needs.
3. Corporate Finance
Corporate finance refers to all of the financial activities that are associated with running, planning, developing and controlling the capital structure of a business. It aims to increase organizational value and profit through optimal decisions on investments, finances as well as dividends. It focusses on capital investments aimed at meeting the funding requirements of a business to attain a favorable capital structure.
Corporate finance emphasizes the desire to maximize the financial ability of a company and its stockholders. The departments working under this branch of finance primarily manage a company’s financial activities. They take crucial decisions regarding organizational budgeting, investments, and capital allocation.
4. Public Finance
Public finance is a type of finance through which the federal, state, and local institutions track revenue and manage expenses for all the services they provide to the public. Example of public finance includes: public revenue, public expenditure, public debt, financial administration and Public budgeting are the main major subject matter of the public finance.
One of a government’s most essential functions is generating money through trade, taxes, and loans and distributing income across multiple functions like debt servicing, infrastructural development, and recurrent expenditure.
Public finance also refers to the income and expenses incurred by the government at different levels. Income sources for public finance can come from gifts, fines, fees, taxes, and more.
5. Private Finance
Private Finance is all about the management of finances at an individual level. When we talk about private finance the sources of income for an individual are confined. Individuals adjust their spending as per their income.
When a company doesn’t want to raise funds by offering shares or is in a position where it can’t be on the securities exchange it will have to raise money privately. Non-profit organizations may have to put together a private financial plan to secure funds.
6. Personal Finance
Public finance is a field of finance in which one studies the role of government and the impact of the various activities undertaken by the government, in an economy.
This is finance as it applies to the monetary decisions made by either an individual or a family. The activities include saving, spending, and budgeting money for both the short and the long term. Personal finance should take into account financial risks and future potential life events based on current net worth and the cash flow in the household.
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