Financing Continued…

Financing by large organizations

While individual homebuyers may run into the need for some form of financing for large purchases, many times businesses and even governments will also need to undertake financing in order to raise capital for investments, expansions, or simply operating costs. This type of financing may also be provided by a bank or financial institution, but many times the amounts are much greater than most banks are willing or able to offer, and the company or agency must turn to other methods of raising capital.

Debt financing is the term used when an organization raises money by selling bonds, bills, or notes to individuals or other organizations. Bonds, bills, and notes must be paid back by the issuing organization within a specific period of time with a pre-set interest rate, hence the term “debt financing.”

Asset financing involves cash that is received in exchange for a security interest of certain assets. For example, an organization that possesses a certain inventory may attempt to receive capital in exchange for lending certain individuals or groups a security interest in the contents of the inventory.

Equity financing is a well-known form of raising capital, where a company sells stock – or shares of the company – to investors. In exchange for the price paid for the shares of stock, the shareholder receives a proportional percentage of the company itself, usually in the form of voting rights, dividends calculated from corporate profits, and other similar privileges.

While these and many other types of financing are considered debt or equity offerings, off-balance-sheet financing is also popular and involves the raising of capital through joint ventures, partnerships, and operating leases.

Financing is a process that almost every individual will face at some point in his or her life, and many of us more than once. Businesses, corporations, and government agencies also find themselves in need of financing, and although the methods the groups may investigate differ, the result is always the same. The multitude of banks and financial institutions issuing capital is a testament to this thriving sector of the economy.

By Kira Lee