Investing is an act of buying and selling of financial instruments either through a sale of securities in a stock exchange or through a sale of goods. While many people have a very casual idea as to how funding & investors work, there are actually two distinct forms of investing. One deals with the purchase of securities and the other with the sale of such securities. In a traditional investment, investors put their money into an investment fund. The fund managers use the proceeds from the investments to make investments that are meant to earn returns that are higher than the interest earned by the funds. Typically, such returns are not high enough to justify the costs incurred by the managers.
On the other hand, funding & investors deal specifically with the lending aspect of investments. There are many different sources of funding, such as banks, financial institutions, private individuals, and other third parties that invest in different companies and issues. When an investor borrows money from a bank, for example, the bank makes a security agreement with the investor. The investor promises to repay the loan on a timely basis, and interest is paid on this secured loan. This form of investment is called secured debt investment.
Another form of funding & investors deals with unsecured loans, which obviously are loans that do not require collateral. These loans are typically made by private individuals or businesses. The money is usually raised from a number of investors, but they are not obligated to buy the issue or make any commitment. Investors usually use the money to make an acquisition. The risks involved in this form of funding & investors are also higher than with secured debt investments.
However, even in this case, the benefits of debt investment over other sources of funding are often not felt immediately until the later stages of the business cycle. Most businesses make profits during the first years of operations. As a result, the company can pay back its loans, but it may have difficulty in paying back the money that it took to acquire the property or to establish the business itself. On the other hand, most investors are sophisticated enough to realize that the business can eventually pay off its loans and run its operations profitably. Therefore, investors usually wait to provide funding until the company has proven that it is making a profit. This means that most debt investment takes longer to payoff than conventional financing from banks.
In addition, there are some businesses that cannot qualify for traditional financing from banks, like startups, new businesses, and home businesses. These businesses usually need seed money from an investor prior to going public or being listed in a stock exchange. The risks associated with raising capital through a private investor are higher than with a bank, so companies that need seed money tend to seek out professional funding & investors instead of relying on the advice of personal friends. However, there are some instances where funding & investors choose to go with friends, family members, or acquaintances.
All in all, there are various types of funding sources available to both large and small businesses. For some investors, the risk of lending money to a startup is more worrisome than the rewards of doing so. Smaller businesses, on the other hand, typically do not have as many problems raising capital as larger companies.
