Definition of Sources for Finance

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A company often needs external funding to operate.
A company often needs external funding to operate. (Image: finance image by Christopher Hall from <a href='http://www.fotolia.com'>Fotolia.com</a>)

A company often needs external financing to operate in the short term and long term. Senior management usually reviews a firm's statement of financial condition to gauge cash levels needed in operating activities.

Function

A finance source, or financing method, helps an organization meet short-term operating needs, such as paying for costs of materials, salaries and other administrative expenses. Financing also helps senior leadership plan for long-term expansion projects, such as mergers and acquisitions.

Significance

Financing is a significant business practice in modern economies. A firm with no access to financial markets, or unable to raise funds privately, may have difficulties operating. Senior leaders may be unable to set long-term goals without funding.

Types

Types of financing products vary, but the most common are equity and debt products. Equity products include shares of common stock and preferred stock. Debt products include bonds, private loans and overdraft agreements.

Equity Financing

Equity financing helps top leadership raise funds by selling shares of equity, or stocks, on securities exchanges. A shareholder, also called stockholder, receives regular dividend payments and makes profits when share prices rise.

Debt Financing

In a debt financing program, a firm issues regular bonds or convertible bonds on financial markets. A buyer of bonds, otherwise known as a bondholder, receives periodic interest payments during the bond term. The principal amount is refunded at maturity.

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