Financing

Financing is the act of providing funds for business activities, projects, or personal needs by acquiring capital with an obligation to repay or generate return. It involves choosing a capital structure and securing funds from external or internal sources. Financing decisions influence cost of capital, risk, control, and liquidity.

There are two broad categories: debt financing, which raises funds via loans or credit instruments that must be repaid with interest; and equity financing, which raises funds by selling ownership stakes or future claims to profits. Hybrid instruments, such as mezzanine debt or convertible notes, combine features of debt and equity.

Common sources include banks and financial institutions, venture capital and private equity, public markets through stocks and bonds, government grants or subsidies, and crowdfunding or internal accruals. The choice depends on factors such as cost, availability, risk tolerance, and dilution of ownership.

The financing process typically involves planning and financial modeling, presenting a proposal to prospective funders, negotiating terms, and closing the agreement. Key terms include principal, interest rate, maturity, covenants, collateral, and, in equity deals, ownership percentage and control rights.

Impact and considerations include the cost of capital, the effect on leverage and solvency, potential dilution for owners, and the alignment of incentives with lenders or investors. For individuals, financing relates to personal loans, mortgages, and credit products, judged by creditworthiness and repayment ability.