Financing — meaning and types of financing
What is financing?
The term funding means raising capital for investments. It comprises all processes related to Provision of capital are necessary for private individuals or companies, as well as the associated repayment obligations. Basically, between Internal and external financing as well as Equity and external financing differentiated. For private individuals, financing is often associated with borrowing, for example to buy a house. Through various types of financing, companies ensure the necessary liquidity and profitability to remain successful in the long term.
What is maturity?
Deadline describes the duration of financing and has an influence on financing conditions. A distinction is made between:
- Short-term financing (up to 1 year)
- Medium-term financing (1 to 5 years)
- Long-term financing (longer than 5 years)
For borrowers, maturity plays an important role, as it is linked to factors such as creditworthiness, loan amount and interest rates. Mortgage financing also often requires follow-up financing, provided that a remaining debt remains.
What financing reasons are there?
There are many reasons for financing. Companies need capital to set up, expand, acquire operating resources or carry out major projects. Private individuals often use financing to purchase real estate, to reschedule existing liabilities or for consumer goods. The reasons for financing are manifold. Companies need capital to set up, expand, acquire operating resources or carry out major projects. Private individuals often use financing to purchase real estate, to reschedule existing liabilities or for consumer goods.
The most important types of financing
Funding can be further divided according to purpose and duration:
- financial credit: Banks or FinTech companies grant this loan against interest and repayment.
- Deposit and equity financing: Investors provide capital and receive company shares and say rights.
- leasing: A lessor provides items such as vehicles or machinery in installments without the lessee having to use equity.
- factoring: Here, a company sells receivables to a factoring company and thus immediately receives liquidity.
- Shareholder financing: The shareholders are increasing their deposits to finance the company.
- Start-up financing: Business angels finance start-ups because banks are often skeptical of new companies without collateral.
note: Any form of external financing increases the company's indebtedness and leads to external control, which must be carefully weighed against each other.
Equity and external financing
Funding is either provided as Self-financing or external financing classified:
- Self-financing: The funds come from profits or from external investments. Equity providers receive voting rights and profit sharing and usually also assume liability. Equity remains available to the company on a long-term and indefinite basis.
- external financing: The funds are available for a limited period of time and are attributed to borrowed capital. A company becomes indebted by borrowing capital and pays interest and repayments. A distinction is made here between short-term (e.g. current account loans) and long-term loans (e.g. bank loans or bonds).
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