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What are the three main sources of financing for any firm?

Question:

What are the three main sources of financing for any firm?

Financing:

A major prerequisite for any business to take off is sufficient capital to fund its operations before it starts turning a profit. Many options are available to businesses when it comes to raising initial capital.

Answer and Explanation: 1

1. Equity capital

For new businesses, investors may opt to bring investors on board in exchange for equity. Investors put their money into the company in exchange for some share of the business. In the future, when the company becomes profitable, they are eligible for a cut of the profits equivalent to their investment in the business.

2. Debt capital

Alternatively, new or existing businesses may take a loan from a lender, usually a bank, or issue a bond instead of getting investors. Loans are paid back with interest to the bank. For bonds, interest payments are made periodically to the investors, and the full amount is refunded in full on the bond's maturity.

3. Retained earnings

When businesses start turning a profit, they spend some or most of it on re-investments. These are retained earnings, money from the business that is re-invested in the business.


Learn more about this topic:

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What Is Financing? - Definition & Types

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Chapter 8 / Lesson 7
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When a person is need of financial assistance, they may go to a financial institution and request financing, which is when a financial institution sets up a program to help a lender make a purchase with the promise to repay in an affordable manner. Explore the idea of financing, looking at the different types of financing that are available to consumers.


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