Financing

Financial Dictionary -> General Finance -> Financing

Financing is the financial term that relates directly to raising funds for one purpose or another. It usually refers to taking out some kind of credit, rather than using funds already available, such as savings or retained profit.

There are many options for the financing process. You can obtain an overdraft from the bank, use a credit card, and take out a loan with interest. If you own or operate a business you can also seek out private investors, go public on the stock market, take out trade credit with suppliers, lease equipment, or see if you are eligible for a government loan.

For effective financing a business or individual needs effective financial planning, accounting, and an exact idea of how much is needed for the project at hand. In the following example finance was raised, but there were no foundations to support it:

John Smith left school to set up his own business. His friend Mark was an engineer and had designed an innovative new lawnmower that could cut grass and dig out tough weeds at the same time. Between them they had $10,000 to invest, which was enough to build one unit to use as a model for investors. After being told they needed a business plan they approached the bank who gave them a $50,000 loan to build a small workshop and hire staff to make more units.

Unfortunately it was November and they hadn't taken in to account that people do not purchase lawnmowers until the spring. Now with no profits coming in and suppliers demanding money for the materials, the pair had to close the business, and sell off the patent to cover the costs of the loan and the suppliers. In this case finance was raised, but poor planning and accounting caused their business to fail.