Financing provides you with many valuable perks, but it comes with certain responsibilities as well. On the one hand, it empowers you to reach your personal and professional goals even if you currently have limited resources. On the other hand, you will be required to make regular payments to pay off your loan over time.
In this blog post, you’ll discover what financing is and how it works. Find out if finance is your friend or your foe so you can decide if you should take advantage of it or not.
Financing is defined as the procedure of providing monetary funds for personal purchases, business activities, and investment ventures.
It is essential to the economy because it gives individuals and businesses the opportunity to buy products and services that they cannot afford otherwise with their own limited resources. It allows people and companies to maximize the time value of money (TVM) by utilizing future expected income to jumpstart present projects.
Financing is typically provided by institutions that are known as financial intermediaries. These intermediaries channel funds to businesses and consumers in the form of loans, credit, or invested capital.
According to Britannica, these are some examples of financial intermediaries:
- Savings banks
- Commercial banks
- Savings and loans associations
- Finance institutions
- Credit unions
- Insurance companies
- Pension funds
- Investment companies
There are two primary types of financing, according to Investopedia. You’ll need to learn how these kinds of financing work depending on your needs.
Debt is a type of financing that gives individuals the chance to buy personal assets via home mortgages, car loans, etc. It can also grant you the capital you need to start a new business.
It requires repayment, although the exact payment terms may vary based on the specific loan arrangement. Typically, all of them will have an interest rate, because otherwise, the lender receives no benefit from you.
Some financial intermediaries also require collateral. It is easier to have small loans approved if the assets you purchased can serve as collateral.
Take note that you do not acquire full ownership of the assets you purchased via debt financing until you have completely paid off your debt.
Equity is a type of financing that involves giving up a portion of company ownership to the equity investor. This entails relinquishing part of the control to the investor by allowing them to influence the company operations and to vote regarding business decisions.
The equity investor gains a claim on a specific percentage of future earnings. However, the investor also risks receiving nothing in case the company does not make profits.
Financing has its advantages and disadvantages.
It can be considered your friend because it allows you to immediately utilize financial resources that you do not presently own to enhance your personal assets and to improve your professional productivity. It helps you to overcome the monetary limitations that are set by your current salary and financial standing.
To be realistic, however, financing also confers specific responsibilities to you. Whether you borrowed cash to make personal investments or to start a business, you need to make prompt, timely payments so you can pay off your debt after a certain period of time.
Still, financing cannot be considered your enemy in all cases. After all, you will only experience legal trouble if you are not able to fulfill the requirements properly. It basically depends on how successfully you meet your financial obligations.
You can turn financing into your friend by making the most out of your financial arrangements. Follow these practical tips from the Federal Trade Commission (FTC):
- Obtain a copy of your credit report before you apply for financing programs. This document includes information that will determine if you are qualified for certain loans or not.
- Save up for a down payment if you are purchasing personal assets like homes or cars. This down payment will lessen the total amount you need to finance in the long run.
- Explore multiple financing options so you can find the one that best suits your financial needs.
Educating yourself about financing will allow you to gain all the benefits of it without the potential disadvantages. Increasing your knowledge about useful topics such as debt, credit scores, and debt consolidation loans is highly beneficial if you are planning to apply for financing.
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