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Role of Financing |
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Financing plays a major role in the world of business. The reason for this important role is the fact that at some time or another any business needs financing, most often from external sources. If there is no flow of investment and financing into a company and the economy, the amount of capital in is most likely to decrease, and there are a number of reasons for that decrease. The decrease in the amount of capital is known as depreciation, and financing is required to make up for reduction in the level of capital.
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There are a number of reasons why companies and businesses need financing. They might be starting a new business altogether, or expanding the business which already exists. Another reason for financing is that the business is in some sort of a crisis and they urgently need financing on a short term basis to get out of that crisis.
One of the ways through which a business can obtain financing is through bank loans or through debt financing. But this is not so easy because a bank will not put its capital at risk if it is not sure about the business. Most of the banks also do not provide a loan without keeping some sort of collateral with them in case the business makes default in the making of payments.
Another way to get financing from external sources is through equity financing. These are basically private investors, but they want a return on their investments. The return on investment can take the form of dividends or a share of the profit. |
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