What Are the Functions of Finance in the Business World?

The creation of capital is the cornerstone of capitalism.

Finance is the fuel of an economy. Control of the sources of finance, and how it is conducted, imparts powerful influence over the direction and goals of that economy.

History

Modern finance is not very different from its 13th century beginnings in the ports of Italy and Holland, where merchants funded their trading ships through selling shares in their loads of goods or borrowing from the early bankers of Venice and Florence.

Function

Finance makes commerce possible. A merchant must have money to acquire goods to sell to his customers. Raising capital by selling shares in the business, or borrowing money on a promise to repay principal with interest when the merchandise is sold, provides the money the merchant needs.

Types

Merchant finance or trade finance funds the international import-export industry through the use of letters of credit and bank loans. Corporate finance includes the sale of common stock and bonds to provide money that builds office buildings and manufacturing facilities. Consumer finance helps people buy cars, appliances and other durables and includes credit cards and payday loans.

Significance

The creation of capital through finance is the basis of capitalism. It encourages research and development, innovative design and customer service because the better company that produces the better product gets better financing terms and makes more money.

Considerations

Finance makes it possible for investors to speculate on business deals and make profits and losses. Values of goods and services are a direct representation of the demand for them in the marketplace. Demand will go to the superior product, and that encourages industrial growth and technological progress.

References

• Economywatch.com: Type of Economic System
• "The Origins of the Modern Financial Revolution: Responses to Impediments from Church and State in Western Europe, 1200-1600"; John H. Munroe July 11, 2001

Resources

• Lectures by economists on the history of finance