INSTRUMENTS OF BUSINESS FINANCE, Instrument of business finance also called Financial Instrument is a physical or electronic document that has intrinsic monetary value or transfer value. An instrument is a means by which something of value is transferred, held, or accomplished. In the field of finance, an instrument is a tradable asset, or a negotiable item, such as a security, commodity, derivative, or index, or any item that underlies a derivative.
EXAMPLES OF INSTRUMENTS OF BUSINESS FINANCE,
There are several instruments of business finance that are commonly used to raise funds, manage cash flow, and support various financial activities within a company. Here are some important instruments of business finance:
- Equity: Equity represents ownership in a company and is raised by issuing shares to investors. Equity financing allows businesses to raise funds without incurring debt. Equity investors become shareholders and may receive dividends or capital gains based on the company\’s performance.
- Debt: Debt financing involves borrowing money from lenders or financial institutions with an obligation to repay the principal amount along with interest over a specified period. Common forms of debt instruments include loans, bonds, debentures, and commercial paper. Businesses use debt financing to fund operations, expansions, or capital expenditures.
- Loans: Loans are a type of debt instrument where a specific amount of money is borrowed from a lender and repaid over a predetermined period, usually with interest. Loans can be obtained from banks, credit unions, or other financial institutions. They are commonly used for various purposes, such as working capital, equipment purchase, or real estate acquisition.
- Bonds: Bonds are debt securities issued by corporations or governments to raise capital. When an entity issues a bond, it promises to repay the principal amount at a specified maturity date and make periodic interest payments to bondholders. Bonds are often traded on financial markets, allowing investors to buy and sell them.
- Commercial Paper: Commercial paper is a short-term debt instrument issued by corporations to meet short-term funding needs. It represents an unsecured promissory note with a fixed maturity typically ranging from a few days to a year. Commercial paper is usually issued at a discount to its face value and is commonly used by large, creditworthy companies to manage liquidity.
- Leasing: Leasing is a financial instrument that allows businesses to use assets, such as equipment or vehicles, without purchasing them outright. The lessor (owner of the asset) grants the lessee (business) the right to use the asset for a specified period in exchange for regular lease payments. Leasing helps conserve capital and provides flexibility in managing equipment needs.
- Factoring: Factoring is a financing arrangement where a company sells its accounts receivable (unpaid invoices) to a third party called a factor at a discounted price. The factor assumes the responsibility of collecting the outstanding receivables from customers. Factoring helps businesses improve cash flow by accessing immediate funds instead of waiting for customers to pay.
- Venture Capital and Private Equity: Venture capital and private equity involve investment in companies that are in the early stages of development or seeking growth and expansion. Venture capital firms and private equity investors provide funding in exchange for an ownership stake in the company. These investors often provide expertise and guidance to help the company succeed.
Financial instruments may be divided into two types: cash instruments and derivative instruments.
Debt-Based Financial Instruments.
For example, cash is a financial instrument.
A contractual obligation is also a financial instrument as a deed that records home ownership.
INSTRUMENTS OF BUSINESS FINANCE
We can divided sources of finances according to the value of finance required in three categories:https://www.quora.com/What-are-the-basic-instruments-for-business-finance
A-Very High Value of Finance Required:
2-Debentures / Bonds Issuance at Stock Exchanges
3-Long Term Loan from Banks (Note: for new business State Banks of every country offer long term loans at subsidized markup rates & on easy terms)
4-Private Financing (also known as Private Placements of shares/debentures)
B-Medium Value of Finance Required: INSTRUMENTS OF BUSINESS FINANCE
1-Long Term/Short Term Loans from Banks (Note: for new business State Banks of every country offer long term loans at subsidized markup rates & on easy terms)