What is Financing

It is known as financing or financing the mechanism through which money is contributed or a credit is granted to a person, company or organization so that it can carry out a projectacquire goods or services, cover the expenses of an activity or work, or fulfill its commitments with its suppliers.

financing is an important engine for the development of the economyas it allows companies to access resources to carry out their activities, plan their future or expand.

The most common way to obtain financing is through loans or credits to banks. It is usually money that must be repaid in the near or distant future, with or without interest, in full or in installments.

Short and long term financing

In temporary terms, there are two types of financing: short-term and long-term.

short-term financing: is one whose maturity is less than a year, such as, for example, bank credit.

long-term financing: it is the one whose expiration term is greater than a year, although it may also not have a deadline for its return (when it comes from friends or relatives). Such is the case of capital increases, self-financing or some bank loans.

Internal and external financing

Depending on their place of origin, financing can be divided into external and internal.

internal financing: it is the one in which the company uses its own economic means, product of its activity, to reinvest its profits in itself. It can come from reserves, own funds, amortizations, etc.

External financing: is the one that comes from investors who are not part of the company. For example: bank financing or a sponsor.

Own and external financing

Financing can also be distinguished by taking into consideration its ownership.

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own financing: It is made up of those financial resources that belong to the company and that it is not obliged to return, such as reserves and share capital.

External financing: It is made up of all that money that, despite being in the company, belongs to third parties, and that has entered it through credits, so that at some point it must be returned.