Evidence proved that the origin of finance is also old like human life on this earth.
Originally, the word finance is a French word. In the eighteenth century, it was
adopted by the English to mean “the management of money.” Finance is the
management of funds or money and involves activities such as budgeting,
borrowing, forecasting, investing, lending and saving. In other words, finance is
the study of managing funds and the process of acquiring the required funds.
Types of Finance
There are mainly two types of finance:
1. Debt Finance and
2. Equity Finance.
The other types of finance are
 Public Finance,
 Personal Finance,
 Corporate Finance and
 Private Finance.
Each of the types is explained below with definition and explanation.
1. Debt Finance:
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Basically, the cash which you acquire to maintain or run your business is known
as debt finance. Debt finance does not provide ownership control to the
moneylender; the borrower must repay the principal amount along with the agreed
upon interest rate. Mostly, the interest rate is determined based on the loan
amount, duration, the purpose for borrowing the specific type of finance and
inflation rate.
Debt finance can be classified into three types:
Short-term
Medium-term and
Long-term
Short-term Debt Finance:
Loans generally needed for a period of more than one to one hundred and eighty
days is called short-term debt finance. These loans are borrowed for covering the
shortage of finance and temporary or occasional requirements. Short-term finance
is basically required for daily business activities such as paying wages to the staffs
or getting raw materials. The amount of getting a short-term loan is dependent
mostly on the other sources of income for repaying. The lines of credit from the
business’s suppliers are the most common forms of short-term debt finance.
Trade credit, credit cards, bill discounting, bank overdraft, working capital loans,
small business loans, short-term loans from retail banks and advances from
customers are some other forms of short-term finance.
Medium-term Debt Finance:
Loans generally required for a period of more than one hundred and eighty to
three hundred and sixty-five days is called medium-term debt finance. The way
of utilizing the funds are mostly dependent on the type of business. The businesses
generally, repay the loan from the sources of cash-flow of the businesses.
Businesses choose this type of finance to purchase equipment, fixed assets and the
like.
Sometimes small business owners or startups use medium-term debt finance for
fulfilling the fund’s rotation. Because new businesses must pay beforehand to
suppliers for every required good such as buying equipment, machinery,
inventories and the like. Hire purchase finance, lease finance, medium-term
credits from commercial banks and issue of bonds/debentures are some examples
of medium-term debt finance.
Long-term Debt Finance:
Loans generally required for a period of more than three hundred and sixtyfive days is called long-term debt finance. This type of finance is mostly needed
for buying plant, land, restructuring offices or buildings, etc. for a business. Long-
term finance has a better interest rate than short-term finance. This debt finance
usually has a repayment duration of five, ten or twenty years.
Car loans or home loans are two popular examples of long-term finance. Issue of
bonds/debentures, Issue of preference shares, issue of equity shares, long-term
loans from government, financial services institutions or investment banks, venture
funding or funds from investors, are other examples of long-term debt finance.
2. Equity Finance:
Equity finance is a classic way of raising capital for businesses by issues or offering
shares of the company. This is one of the major differences in equity finance from
debt finance. This finance is generally applied for seed funding for start-ups and
new businesses. Well-known companies apply this finance to raise additional
capital for the expansion of their business.
Equity finance is generally raised by issues or offering equity shares of the
business. Basically, each share is an owner’s unit for that specific company. For
instance, if the company has offered 10,000 equity shares to public investors. An
investor buys 1000 equity shares of that company, means s/he holds 10% of
ownership in the company.
The other types of finance are discussed below:
Public Finance:
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Public finance deals with the study of the state’s expenditure and income. It
considers only the government’s finances. The scope of public finance includes the
fund’s collection and its allocation among different sectors of state activities that
are considered as essential functions or duties of the government.
Public finance can be classified into three types:
Public Expenditure
Public Revenues
Public Debt
i. Public Expenditure:
Public expenditure means the expenses incurred by the government for its
maintenance and for the welfare and preservation of the economy, society, and
the nation.
ii. Public Revenues:
Broadly public revenues include all the receipts and income irrespective their
nature and source, which the government acquires during any given period. It will
also include the loans raised by the government. Narrowly, it will include only the
income from revenue resources which include taxes, price, fees, penalties, fines,
gifts, etc.
iii. Public Debt:
Public debt means the loans raised which is a source of public finance carrying
with it the repayment obligation to the individuals and the interest.
Personal Finance:
Personal finance denotes the application of finance’s principles to the monetary
decisions of a family or an individual. It includes the ways in which families or
individuals get, budget, spend and save monetary resources over a period,
considering different future life events and financial risks. Financial position is
focused on understanding the available personal resources by examining the
household cash flows and net worth. Net worth is an individual’s balance sheet,
derived by summing up all assets under that individual’s control, minus the
household’s all liabilities at a time.
Corporate Finance:
Corporate finance includes financial activities pertaining to running a corporation.
It is a department or division which oversees the financial functions of a company.
The primary concern of corporate finance is the maximization of shareholder value
through short-term and long-term financial planning and different strategies’
implementation.
Private Finance:
Private finance denotes an alternative method of corporate finance helping a
company raise fund to avoid monetary problems with a limited time frame.
Basically, this method helps a company which is not listed on a securities exchange
or is incapable to obtain finance on such markets. A private financial plan can also
be suitable for a nonprofit organization.