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Financing and investing are two very different activities that serve a common purpose: to bring money into an organization. Financing is the act of obtaining money through borrowing, earnings or investment from outside sources. Investing is the act of obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. Financing and investing activities of a business entity are vital to the long-term success of a company.
Borrowing
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Borrowing money is the most straightforward way to finance a business. Borrowed money can come from a range of sources, including banks and credit unions, or family and friends. Debt financing can also be obtained through credit arrangements with suppliers, allowing companies to purchase materials or inventory on account and repay the supplier when the inventory has been sold -- assuming it is sold within the repayment period.
Investor Funding
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Obtaining money from investors is a more complicated form of business finance. Investment capital can come from venture capitalists or angel investors, who are likely to demand an ownership stake in the business, a good deal of managerial control and an agreement to buy back the investor's share at a premium in the future.
See AlsoExpense vs Investment | JM FinnSelling shares of stock to the public is another way to secure capital from investors, and there are often less strings attached. Stockholders vote by majority on issues such as executive appointment, whereas single investors exercise control as an individual.
Retained Earnings
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Saving profits for a period of time can allow a business to raise debt-free capital with no strings attached. Saving a portion of profit in retained earnings over time can take longer than obtaining a loan or investment, however, possibly causing you to miss time-sensitive opportunities. For such goals as gradual, continual growth, however, financing through earned income can be the safest and most cost-efficient means of raising money.
Productive and Real Property
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One type of business investment is the purchase of productive and real property. Productive equipment -- things like machines, automobiles and technology --directly contributes to a company's ability to produce high-quality goods and services at a reasonable cost. Real property -- land and buildings -- are also essential to small business growth. Real property provides the space needed for employees to use productive equipment to accomplish organizational goals.
Income Investments
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Purchasing investment products is fundamentally different from investing in productive and real property. Investment products such as stocks, bonds, annuities, CDs and other interest-bearing accounts can help a company to grow its wealth outside of its normal business activities.
Real property can also be used to directly generate income rather than to provide space for operations. Buying real estate for the purpose of renting or selling it at a premium can be a wise investment.
