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What Are the Different Types of Business Finance?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 07 November 2016
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Corporate finance techniques help a company create a plan for its capital structure. Different types of business finance allow a company to complete large projects without draining working capital. The two broad categories for business finance are debt and equity. Beneath these levels, the different types of business finance are loans, bonds, stock, and venture or mezzanine capital. Companies are often free to select which method to use based on current economic conditions, available funds, and methods for repayment to the lender or investor.

Loans are typically the most common debt type of business finance and are available from a variety of lenders, making it possible for a company to shop for the best interest rate and repayment terms. In some cases, a company may only need a short-term loan; therefore, a credit line is a good option. Secured loans held by collateral are common when a company needs to purchase land, buildings, or equipment. Other loan types are available depending on the company’s needs.

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Bonds are another type of debt financing. Larger companies often use these types of business finance to offset the use of equity funds. While bonds often allow a company to secure funds for a set time and interest rate, some downsides do exist. For example, companies must often repay the loans regardless of their financial condition. Investors, who view bonds as heavy leverage, also frown upon bonds; companies with a lot of bonds may be unable to pay investors when funds are low.

Equity financing typically has a few more options in terms of external funds. Large organizations can issue stock, one of the most common types of business finance. Corporate and individual investors can purchase stock and wait for stock price increases or other advancements in the company in order to earn financial returns. Companies do not generally have to repay investors the stock purchase price, though dividends may be in play. Therefore, equity investments are often more favorable than debt.

Venture and mezzanine capital are hybrid financing methods companies can use. Venture capital are funds from investors a business secures for starting new operations. Mezzanine capital is a preferred equity loan that is senior to stock shares. These types of business finance are subject to the terms of agreement, making them a mix between debt and equity financing. Companies are often free to create an agreement for venture mezzanine capital when securing these types of business finance.

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Bhutan
Post 2

@Cupcake15 - I think that it depends on the company. I had a friend that was a hedge fund manager and he told me that his firm always sought out venture capital opportunities. They always were on the lookout for the next big firm that was going to be the next Microsoft.

A lot of these hedge fund investors invested a lot of money into new and promising companies and sometimes they were pleasantly surprised. My friend was telling me that they research these companies carefully before they invest, because if he made a mistake and lost money, he would not get paid any type of commission.

cupcake15
Post 1

Years ago I worked for a private company that was considering going public and the main motivation was that the company wanted to expand and the capital that they would receive from the issuance of stock would enable them to finance the expansion.

I think that people are more willing to invest in a company stock especially when it is an initial public offering than with a corporate bond because they don’t know if they will be repaid or not with a corporate bond. I know that I would never buy a corporate bond for that reason.

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