Types of Finance and Their Effects on the Economy3 min read
Finance is the art and science of acquiring, creating, and managing funds. It deals with money and banking systems as well as the risks and rewards associated with investing in those funds. In simple terms, finance is all about controlling risk in the markets you are involved in so that you can create a plan to ensure your investment yields a positive return.
The world of finance deals with both the public and private sectors. Public finance deals with governmental organizations and their deficits. Private finance deals with individuals, their assets, liabilities, and financial systems. Both the public and private sectors rely on sophisticated financial systems to ensure the long-term viability and success of these institutions. This is where finance comes into play.
One of the most common examples of finance deals is the financing of mergers and acquisitions, which are often part of larger corporate finance efforts. Merger funds require financing that will cover potential losses incurred during integration into the new company. Additionally, some companies are required to finance their acquisition of certain companies as part of the negotiations for the sale or purchase. Other examples of common financing opportunities include debt consolidation for distressed businesses and acquisitions of small businesses from other larger companies with strong balance sheets.
While all of these types of finance deals are important to large corporations, small businesses also have access to the same financial systems and plans that the larger corporation does. The Small Business Administration (SBA), an agency of the federal government, offers various programs designed to help small businesses. Many of these programs are based on offering tax credits to businesses that participate in the program, thereby helping these companies to meet their obligations to both the government and to investors.
Another type of specialized area of finance deals with corporate finance. Corporate finance deals with funding requirements for the purchase of property and equipment that are used in the operation of the company. Some examples of capitalizations in this area may include working capital financing, working capital advances, capital lease financing and acquisitions of property and equipment. The insurance industry is another specialized field of finance that deals primarily with distressed or downsized companies. Most insurance companies offer specialized finance programs to assist businesses with mergers and acquisitions and other forms of corporate finance.
Economics is one of the most widely studied fields in all of finance. Students who choose to specialize in economics to study the role of business decisions in creating economic growth and the impact of those decisions on the public at large. Although many people are knowledgeable about business cycles and how they affect the economy, very few have a full understanding of the role that economics plays in determining the health of the national economy. Finance graduates and those considering a career in finance should always consult with an economic expert prior to making any major investment or financial decision. By putting their trust in the knowledge and expertise of these experts, finance professionals can make better informed decisions and manage their portfolios more effectively.