Funding through financial instruments

Funding through financial instruments

Financial instrument is a document that represents a legal agreement involving some sort of monetary value. Financial instruments can be classified generally as equity based, representing ownership of the asset, debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments are also a type of financial instrument.

Asset Based Funding: Asset Based funding is a method of providing structured working capital and term loans that are secured by accounts receivable, inventory, machinery, equipments or real estate. In this case the asset is taken and there is no need to pay back. This generally refers to funding business and large corporations using assets. This type of funding is usually done when other routes of raising funds like selling bonds to investors is not possible.

Equity Based Financing: Equity based funding is the process of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. In this case, a company raises money by issuing its stocks.

Debt Based Funding: Debt based funding refers to the process of a firm raising money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

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