Types Of Finance

Finance is the method of channeling accumulated money from investors and savers to entities which require it. It usually involves the transfer of money from one financial institution to another, often with the involvement of a bank. The purpose of finance is to make available funds for investment, lending, etc.

There are two main types of finance: the direct financial system (finance dealing with secured borrowing) and the indirect financial system (finance dealing with unsecured borrowing). In the direct system, money is lent, and the borrower repays the money by some kind of income creation process. Money is lent to businesses and other financial institutions. Businesses create new jobs, and the investors pay interest and dividends to banks. When all the parties involved in finance see the potential value of the new loan, they collectively pool their resources to provide capital to finance the business.

The second type of finance is called the indirect system of finance. This system is more similar to the stock market in that it also involves the process of pooling resources to provide capital to other enterprises. But unlike the stock market, money is borrowed in large amounts and secured against that capital. The difference between the two financial systems lies in the fact that capital markets facilitate and respond to demand, while the stock market facilitates and respond to supply. Because bank loans are needed to finance business ventures, there is a balance between supply and demand in the capital markets.

The major source of finance comes from banks, either publicly or privately. Public banks are generally chartered banks that operate for the benefit of the public. Private banks generally belong to a group of commercial banks that are not chartered. Both kinds of banks make loans to corporations. Most of the time, corporate finance comes from banks with the help of private lenders.

In addition to borrowing money and providing capital, public finance also includes the buying of financial assets by the public. An example of such an asset would be a property. The purchase of such an asset can be made for a fixed term, either for a period of years or decades, or it can be made for a much shorter period, perhaps a day or two. The purchase of financial assets such as these ensure that funds are available to the public when they need them.

Private financial organizations can also help finance businesses. These lenders typically purchase money owed by people to businesses (such as car companies) or credit card companies. They then extend those loans over a period of time or pay a lump sum amount for the outstanding balances on the accounts. When businesses need additional capital for their operation, private lenders may even provide that capital, although it is rare for them to do so.