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  • Financing refers to the provision of funds for a business or an individual for business activities. In business, financing is usually referred to as the process of borrowing from a formal or informal lender. That lender can be a bank, a financing institution, an individual (an investor or a formal lender) 

Types of Financing

Financing can be classified into two major categories according to its type.

  • Equity Financing 
  • Debt Financing
 

Equity Financing

In Equity Financing, The business sells a percentage of its ownership to fund the business. In this type of financing the financier shares the liability of the business as well as gets some control over it. Equity financing is preferred by large businesses as they have to sell a very small portion of their business and control. 

Debt Financing

Debt financing is the most common type of financing. In debt financing, the business gets funding in the shape of a repayable amount. In this type of financing, no portion of the equity or ownership is transferred to the lender. Debt financing is usually obtained against some collateral in the shape of a tangible asset. 

The main purpose behind financing is to get funds for business activities. These activities can range from the day-to-day operations of a business to investment in the growth and expansion of the business. 

Types of Business Financing According to Spending

Business Financing can be categorized into two major types according to spending.

  • Working Capital Financing
  • Expansion or Growth Financing 

Working Capital Financing: 

In this type of financing, funds are used to cover day-to-day operational expenses, like rent, payroll, and utility bills.

Expansion or Growth Financing: 

In this type of financing, funds are utilized for the expansion of a business, expansion of a product line, upgrading infrastructure, and entering into new markets.