Sources of Finance - Essay Example

The equity market (also known as the stock market) is the market for trading equity instruments (Federal Reserve Bank of San Francisco, 2005). Shares are the securities issued to the general public and its ownership implies business ownership.There are two different types of shares: Equity shares and Preference shares (Finance.mapsofworld.com, 2013). One of the examples of the equity instrument is common stock shares, publicly traded on national and global Stock exchanges (Federal Reserve Bank of San Francisco, 2005).

Debts are the financial instruments traded for a long period of time. Example of debt instruments are mortgages and bonds (either corporate or government) (Federal Reserve Bank of San Francisco, 2005). Loans are granted by Banks, insurance companies or financial institutions in order to provide working capital or finance capital equipment (Term loan, 2006). Various banks including commercial banks, industrial development banks, and cooperative banks give medium-term loans for a period of 3-5 years (Finance.

mapsofworld.com, 2013). Financial institutions established by State and Central governments give long term loans (Finance.mapsofworld.com, 2013). In order to get long term loan the company is required to limit dividends, to meet minimum working capital and debt to net, etc. (Term loan, 2006). If the company is granted the loan, it is amortized over a fixed period of time (Term loan, 2006). Loans as a source of long-term financing have some obvious benefits to the borrowers, as the principal and interest are the figures that can be calculated and planned in budget.

Also, the duration of the business relationship is defined in the contract and normally ends when the debt is paid out (National Federation of Independent Business, 2009). Equity financing allows a business entity to acquire funds without generating debt obligations. When the company issues shares usually there is no debt burden on the company