Types of Finances: Everything You Need to Know

Finance is the movement of money in the form of investing, borrowing, lending, saving and forecasting. Finance can be categorised into two major categories that are 

• Debt Finance
• Equity Finance

Other categories can be 

• Personal finance 
• Public Finance 
• Corporate Finance 

Equity Finance:

Equity financing involves sales of shares of a company or a part of the ownership of the company in return for cash. It carries no repaying obligation. It majorly includes sales of equity shares, quasi-equity instruments such as preferred stock, convertible preferred stock, equity units. 

If we talk about startups then the startup has various rounds of equity financing as it evolves. It too attracts various investors in its initial stages for funding.

Debt Finance:

It is borrowing money in the form of a loan having repayment obligation. A company has to repay the amount borrowed with the interest. It has no control over the operations of the business  The interest paid on loans is tax-deductible for a company, and loan payments make forecasting for future expenses easy because the amount does not fluctuate. The company prefers a low debt to equity ratio being in good books so that they can make more loans whenever required in near future.

Personal Finance:

Personal finance is all about managing the finances, the money received in the form of salary, revenue in such a manner that provides benefits in later stages. There are various avenues where a person can invest his money by analysing his situation, insurance, cards, borrowing, stocks, pension plans, education. 

It totally depends upon the need of an individual,  savings, requirements. 

For example, a person looking for a stable return will go for Fixed Deposit, Recurring deposits or Fixed Deposit.

Public Finance:

Public Finance can be referred to as Government Finance.  It includes budgeting,  taxing, spending, debt- assurance policy that affect how a government pays for the services provided by them. Its included in fiscal policy.

The Federal and state government plays a major role in preventing market failure by overseeing the distribution of income, economic stability, allocation of resources. Whereas the major funding is secured through taxation.

Corporate Finance:

Incorporate finance the decision majorly regards to the running corporation. The decision regards from where to raise funds through Initial Public Offering (IPO) or through debt financing, which project to put on halt where to invest more. 

Whereas start-up does receive funds from angel broking or venture capital in exchange for certain ownership.

We have various types of finance which are uncovered listing them as private finance, microfinance, trade finance. 

Talking about microfinance, it is for the individuals who don't have easy access to financial services basically lower income group. This is generally to provide them with an opportunity to be self-reliant.

It includes the money raised through saving accounts, recurring deposits, via the facilities provided by banks, it includes the money spent on training sessions to learn for debt financing, financial planning, borrowing. 

Trade finance is making use of financial services, the instruments that enable trade internationally. This comes in handy for importers and exporters. It is basically for reducing the risk involved globally. Unlike conventional finance, it reduces the risk of fraud.

It involves a third party which reduces the risk of payment and supply of goods. In this, the importer is provided with a suitable amount of credit to fulfil the order and the exporter is provided with a receivable and amount according to the agreement to facilitate the export of goods.

This is majorly used to protect against the risk involved such as the currency fluctuations, political instability, issue of non-payments, the creditworthiness of parties involved. There are various financial instruments involved in this such as letters of credit, bill lading.

Written by – Shruti Tayal