Question

When looking at the different types of financing available for businesses, how does this translate to personal finance? Do we have similar options to make as consumers?

Answer 1

Firstly, as we know in the Balance sheet, we show the Asset and Liabilities, also called as sources and application of the funds.

The Borrowing  is also represented by a part of the Capital Employed.The types of financing available for any business entity can be classified into Equity Financing, Debenture Financing and Mezzanine Financing(hybrid of debt and Equity).

The summarized result of the above financing is the features of Risk and Reward.

In Equity Financing the Business has less Risk as there is no fixed cost involved in the cost of raising an equity and dividends can be paid to the shareholders as and when the company earns and feels the need to do so.

In Debt Financing the Business has more Risk as there is a fixed cost involved in the cost of raising a debt and interest has to be paid to the debenture holders on timely basis.

Thus the companies have to compare a proper mix of the debt and equity to maximize the returns of the company based on the proportion of debt and equity and this gives rise to Mezzanine Financing.

Secondly, In personal finance one has to have a reliable source of security on the basis of which the personal finance can be given unlike the financing of business. There is a catch 22 in the repayment of business loan and running the business on loan and earning for the repayment of loan for the business the same is not the case with personal loan and it depends on other sources for repayment.

And lastly, However the same can invested in the share markets or other investments available in the market that are a result of the current business in the market.Thus the personal financing can be invested in the Businesses to gain an added advantage