List and describe the three major types of business financing?

Expert Solution

Three major types of business financing

Equity : Here money is raised by issuing share rather say offereingownership of the company to the investor. Investor gets share of the company against which company gets finance to undertake projects. Cost of equity is always higher than the debt as the share holder are facing business risk as well as do not get fixed return

Bank loan : Loan can be obtained from bank by placing collateral security. This form of financing is cheaper than equity as it entails fixed payment in form of interest and is tax deductible, however such source of financy also brings the risk of bankrupcy

Debentures: It is way of finance which is win win situation for both investor and comapny. Here Debentures are issued by the comapany at the rate which are higher than FD rate offered by bank and lower than loan rate. Thus investor gets high return than FD and company gets cheap finance than bank. It entails fixed payment to debenture holders

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