What Are the Types of Business Finance?

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Business finance goes to the heart of modern-day profitability management. It enables all organizations, small players and stalwart multinationals, to pursue their operating goals and thrive. Without such financial products as equity and debt, the global marketplace would experience reduced productivity, and businesses would find it harder to fund their commercial enterprises.

Equity

  • Equity financing enables a firm to fund its operating activities while maintaining a clean credit profile. The company raises money by selling common stock on such financial markets as the New York Stock Exchange and London Stock Exchange. In modern economies, equity funding often gives way to a long-term shareholder-oriented strategy. This is because publicly traded firms that receive money from external financiers must set proper policies to increase sales and pay periodic dividends. Buyers of equity, or shareholders, may receive dividend payments in cash or stock. They also enjoy another monetary benefit when stock prices rise on financial markets.

Debt

  • A company may fund its operations by borrowing on financial exchanges or reaching out to private lenders. The firm may sell various debt instruments, from traditional bonds and commercial paper to such obscure products as dual-currency debentures and convertible bonds. Holders of dual-currency bonds, or dual-currency debentures, receive principal and interest payments in two different currencies. Companies often issue these instruments to mitigate adverse foreign-exchange fluctuations or take advantage of favorable currency situations in a specific country. Convertible bondholders may exchange their holdings for common stocks if economic conditions are advantageous. Businesses reaching out to such private lenders as banks and insurance companies can receive funds through loans, overdraft agreements and lines of credit.

Strategic Relevance

  • In the global marketplace, the business-finance debate often revolves around the best product a company can use to fund its activities. Some observers contend that stock issuance shields firms from unfavorable situations that often come with high indebtedness and interest rates. Others opine that issuing debt products protects organizations from the relentless demands of shareholders, especially those who place short-term profitability and dividend distributions ahead of long-term business administration. A smart way to settle the dispute might be to issue mixed, or hybrid, products -- such as preferred stocks and convertible bonds.

Financial Reporting

  • Business financing has direct implications for financial accounting and reporting. Financial managers report corporate debts in the statement of financial position, also known as a balance sheet or statement of financial condition. Equity is part of two statements: balance sheet and statement of shareholders' equity.

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