The common financing sources used in developing economies can be classified into four categories: Family and Friends, Equity Providers, Debt Providers and Institutional Investors.
Family and Friends: This source of financing is a popular primary source for many people and small businesses, especially in developing economies. The close familial/friendship relationships between lender and borrower tends to support a level of trust and risk tolerance that most start-ups are unable to secure from outside lenders. This financing is often ‘informal’ (i.e., without a formal contractual agreement) and the transaction sizes tend to be small. The terms and conditions tend to be flexible but relatively patient, reflecting the fact that this sort of financing usually supports start-up or rapidly growing businesses.
Debt Providers: These include commercial banks, microfinance institutions (MFIs), credit unions, and leasing companies, which bundle short-term funds and then extend them as loans or leases. Financial transactions here tend to be larger (with the exception of MFIs), and low-to-medium risk. Debt is an essential financial instrument because of the lower cost relative to equity. It has greater flexibility and does not require the borrower to cede control.
Equity Providers: These include “public collective investment vehicles” such as mutual (stock) funds and exchange traded funds, and private funds such a private equity funds. Such funds tend to be primarily ‘equity’ focused (taking ownership in business rather than a lending to businesses).
Equity providers are often aligned with commercial investors (or investment banks), which are primarily in the business of structuring and selling (often termed “placing”) equity investments to investors and providing financing advisory services to businesses. While investment funds are not prevalent in USAID presence and other developing countries, equity can benefit start-up and rapidly growing businesses by providing longer-term patient capital, and in some cases advisory services, while having a higher tolerance for risk. See Equity vs. Debt for more information related to the advantages and disadvantages of equity and debt, respectively.
Institutional Investors: These include pension funds and insurance companies with large amounts of cash inflows that typically need to be invested over the long-term. Institutional investors are important because of their size and huge appetite for debt and equity. While institutional capital in developing countries remains relatively small, it is growing rapidly and is generating interest as to how it can be unlocked to support development.
FAQs
Debt and equity are the two major sources of financing. Government grants to finance certain aspects of a business may be an option. Also, incentives may be available to locate in certain communities or encourage activities in particular industries.
Is it better to pay cash for a car or finance it? ›
If you have the means, paying cash for a car may help you save the most money. But in certain scenarios, financing a car or utilizing another option may be the better (or only) choice. Whether you should finance a car or buy one outright comes down to your goals, savings and tolerance for debt.
What are the different sources of financing? ›
The sources of business finance are retained earnings, equity, term loans, debt, letter of credit, debentures, euro issue, working capital loans, and venture funding, etc. The above mentioned is the concept, that is elucidated in detail about 'Fundamentals of Economics' for the Commerce students.
What are at least two sources you would use for funding your company? ›
Retained earnings, debt capital, and equity capital are three ways companies can raise capital. Using retained earnings means companies don't owe anything but shareholders may expect an increase in profits. Companies raise debt capital by borrowing from lenders and by issuing corporate debt in the form of bonds.
What is the primary source of financing? ›
Summary. The main sources of funding are retained earnings, debt capital, and equity capital. Companies use retained earnings from business operations to expand or distribute dividends to their shareholders. Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities).
Is a loan a source of finance? ›
A bank loan is a long term source of finance. It is a fixed amount of money that is given to a business by the bank that has to be repaid over time with interest. It is usually expressed as a percentage of the total borrowed., usually in monthly instalments.
Is it good to pay off a car loan early? ›
You'll pay less interest by paying off your loan early since the lender will have less time to collect interest from you. But even an extra payment here and there can make a difference. That extra amount should go directly toward the principal, especially if you specify that intention when you make your payment.
Should you put money down on a financed car? ›
Down payments are usually a necessity. Lenders frequently want at least 10 to 15 percent down. And it may be better for your finances to put down even more. After all, it can save you money each month and help you pay less interest.
Why do dealerships want you to finance instead of cash? ›
It's all about how dealerships can make the most money. Through financing, dealerships make money through interest on loans, making sales people encourage this option the most.
Is financing a good idea? ›
Properly managed, financing can help you build a credit history and strong credit score, both of which will benefit you in the future.
To raise capital for business needs, companies primarily have two types of financing as an option: equity financing and debt financing.
What is it called when you put money into your own business? ›
Otherwise known as bootstrapping, self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your 401(k).
Which is the most expensive source of funds? ›
Preference Share is the Costliest Long - term Source of Finance. The costliest long term source of finance is Preference share capital or preferred stock capital. It is the source of the finance.
How to get a start-up capital? ›
The most common sources of startup funds for small businesses include personal savings, bank loans, and investments from venture capitalists and angel investors. Additionally, innovative methods like crowdfunding and peer-to-peer lending are also becoming popular.
What is an other financing source? ›
These are basically other estimated revenues (sources) or appropriations (uses) that fall outside of estimated revenues and appropriations. This should be considered in the budget at the beginning of the year.
What is an example of a source of funds? ›
Examples of Source of Funds
A legitimate example of a source of funds can include anything where the money was obtained through legal means, such as: wages, bonuses, dividends, and other income from employment. pension payments. interest from personal savings.
What does "funding source" mean? ›
A funding source is an entity that provides all or partial funds (or capital) used to pay for the cost of a project. These funds can be allocated for either short term or long term purposes.
What is a debt financing source? ›
Debt and equity are the two main types of finance available to businesses. Debt finance is money provided by an external lender, such as a bank. Equity finance provides funding in exchange for part ownership of your business, such as selling shares to investors.
