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Forms of financing for private individuals
There are various forms of financing, which can initially be divided into the main categories of internal financing and external financing.
Internal financing
Internal financing refers to financing that can, for example, be managed by retaining prior profits. In any case, funds are provided within a company. No money flows in from outside; the funds come from the company’s own revenue and performance processes. There should be only a small—or no—cash-effective expense associated with the inflow of funds.
Within internal financing, a distinction is made between internally financed equity and debt financing. Equity financing involves self-financing, while debt financing makes use of provisions. Another form of internal financing is factoring. In factoring, receivables from customers are sold for a fee. This means the amount does not have to be collected from the customer and is available immediately. The internal financing potential is indicated by the cash flow metric.
External financing
With external financing, as the term suggests, money flows in from outside that does not originate from the company’s own production process. Here too a distinction can be made between equity and debt financing: owners or entrepreneurs can provide equity capital, which is made available in addition. This is referred to as equity or participation financing. Furthermore, there is the option to finance partially or completely with borrowed capital. For this type of debt financing there are various possibilities, such as loans or the increasingly popular crowdfunding.
Forms of financing for private individuals
This distinction of financing forms primarily concerns companies. As a private individual, financing provided by banks as capital providers is most relevant. While for real estate a full financing or a loan with equity is usually taken out, leasing is often a suitable form of financing for vehicles.