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
Financing Sources. The common financing sources used in developing economies can be classified into four categories: Family and Friends, Equity Providers, Debt Providers and Institutional Investors.
What are the 2 types of financing sources? ›
There are two types of financing available to a company when it needs to raise capital: equity financing and debt financing. Debt financing involves the borrowing of money, whereas equity financing involves selling a portion of equity in the company.
What are 4 sources of short term financing? ›
The main sources of short-term financing are (1) trade credit, (2) commercial bank loans, (3) commercial paper, a specific type of promissory note, and (4) secured loans.
What are the 5 internal sources of finance? ›
There are five internal sources of finance:
- Owner's investment (start up or additional capital)
- Retained profits.
- Sale of stock.
- Sale of fixed assets.
- Debt collection.
Financing Source or “Financing Sources” means, either in the singular or collectively, as applicable, the persons or entities lending money, extending credit or providing debt, equity or lease financing for or secured by the System and any trustee or agent acting on any such person or entity's behalf.
What are the two 2 basic functions of finance? ›
The purpose of the finance function
There are two main purposes of the finance function: to provide the financial information that other business functions require to operate effectively and efficiently. to support business planning and decision-making.
What are the 3 forms of financing? ›
The three sources of finance
- Short-term financing.
- Medium-term financing. In relation to medium-term sources of finance, a business may take out a bank loan. ...
- Long-term financing. Longer-term funding offers the cheapest borrowing terms for businesses.
Short-Term Financing. There are numerous ways a firm can borrow funds to satisfy its short-term needs, but the most common ways are through unsecured and secured loans, commercial paper, and banker's acceptance.
What is a short-term loan called? ›
Short-term personal loans include various types of loans that you have to pay back quickly, such as payday and pawn loans. They don't require good credit, but often have high fees or interest, so try finding a lower-cost alternative.
What are long-term sources of finance? ›
Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.
The main sources of finance are retained earnings, debt capital, and equity capital.
How many sources of finance are there? ›
There are two sources of finance: internal and external. Internal sources of finance come from inside the business, meanwhile, external sources of finance come from outside the business.
What are 3 sources of financial information? ›
In fact, to effectively evaluate the financial performance of the business requires financial information from three sources: a balance sheet, an income statement and a cash flow statement.
What is the ultimate source of financing? ›
Debt and equity are the two major sources of financing. Government grants to finance certain aspects of a business may be an option.
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).
What counts as financing? ›
In the cash flow statement, financing activities refer to the flow of cash between a business and its owners and creditors. It focuses on how the business raises capital and pays back its investors. The activities include issuing and selling stock, paying cash dividends and adding loans.
What are the two types of finance? ›
There are two types of financing: equity financing and debt financing. The main advantage of equity financing is that there is no obligation to repay the money acquired through it. Equity financing places no additional financial burden on the company, though the downside is quite large.
What are the 2 main types of financial statements? ›
The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, revenues, and costs, as well as its cash flows from operating, investing, and financing activities.
What are 2 internal and external sources of finance? ›
Internal financing comes from the business. It's a type of self-sufficient funding. External financing comes from outsider investors, which can include shareholders or lenders who may expect either a percentage of the business or interest paid in exchange.
What are the two main sources of debt financing? ›
Debt financing includes bank loans, loans from family and friends, government-backed loans such as SBA loans, lines of credit, credit cards, mortgages, and equipment loans.
