Difference between Funding and Financing

Every company requires capital to run its business, and it is impossible to continue business without injection of money from time to time. There are different ways to collect money and keep the business running. Sometimes, companies borrow loan from banks and other financial institutions, or they can also take funds from investors in the form of share capital. Retained earnings are also utilized for this purpose. No matter what way they use for to collect money, it can be done either by funding or financing.

Generally, funding and financing are interchangeably used in the financial world, but there is a difference between these two terms. Funding is actually the money provided by companies or by a government sector for a specific purpose, whereas, financing is a process of receiving capital or money for business purpose, and it is usually provided by financial institutions, such as, banks or other lending agencies.

Funding

Funding is an amount of money provided by the organization or government on the basis of an agreement. It is usually free of charge. There may be certain contractual requirements in that agreement, but there are no requirements to pay back the capital. The most common facilitators that normally fulfill the funding needs of an organization are the donations made by governments, or philanthropists.

Financing

Financing, on the other hand, is an amount of capital or the sum of money provided to an organization with the expectation to repay, and organizations are liable to pay back the capital amount along with a certain percentage of interest. Therefore, the repayment also includes an interest component. It is usually provided by financial institutions like banks, or investors like venture capitalists, business angels, shareholders, etc.

Sources of Funds

As already discussed, governments and organizations are the main sources of funds. Let’s discuss these sources of funds in detail.

Government – The government funding is provided to different firms or establishments on the basis of a certain program or department from which it comes, and is basically distributed to private companies, communities, the general public, or other individuals for a specific purpose. The funding programs are available at every level of government.

Philanthropist – Funding received from philanthropists is mostly reserved to charitable organizations that are built for a specific cause. There are various sectors that provide funding for different reasons.

• Corporate Sector – A corporate sector offers funding to fulfill the monetary requirements of community organizations through their Corporate Social Responsibility (CSR) programs, which is a self-regulated program, and is integrated into a business model by different companies.

• Public Donation – This donation is usually provided by large community organizations for different purposes, such as, building schools or awareness programs.

Sources of Finance

Unlike funding, finance can be raised from a number of sources. For example, it can be raised from the community at large, venture capitalists, or banks. These sources are explained in detail below.

Banks – Lending institutions like banks give finance to individuals and organization for the ongoing running of business operations or other purposes. It is usually provided in the form of a loan, with the expectation to earn interest on that loan.

Venture Capital – Venture capital is another source of finance that is usually given to startup businesses. Although, it contains an investment risk, but due to the probability of earning above average future profit, venture capitalists invest in these businesses.

Subsidiaries of banks, wealthy investors, and a group of investment banks, small business investment agencies, and venture capital partnerships are some of the examples of venture capitalists. These institutions are usually rewarded in the form of royalties, profits, capital appreciation of the shares, or preferred stock.

Share Capital – A community, where a business or a particular project is set up, may also finance it with the expectation to earn profit on its investment. This investment is known as the share capital, and it is raised by issuing shares to the general public.

Funding and Financing – Interdependency

In a broader perspective, the discussion between funding and financing should be made clear for better understanding. A source of funding should always be there to support the financing activities. It is a very crucial point, because the availability of finance or capital doesn’t eliminate the need to have funds.

Sharing is caring!