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Functions of Financial Institutions

Functions Of Financial Institutions

Banking institutions or financial institutions are organizations that supply the financial expenses needed by an individual or business. These companies are also considered as Licensed Money Lender because they offer to let those who pursue such funding to borrow money and focus only on the aspects of lending; and to know more about them, Visit Easy Find. Generally, financial institutions are categorized into three types: investment institutions, contractual institutions, and depository institutions.

Investment institutions include brokerage firms, underwriters, and investment banks. For the contractual institutions, pension funds and insurance companies fall into this type. And for the depository institutions, mortgage loan companies, trust companies, credit unions, building societies, and banks are just some of its examples.

Furthermore, financial institutions offer various plans and services. This then results in different functions that are compiled and overviewed below.

To finance capital

Financing the capital is a special type of funding provided by financial companies to business establishments for a daily or long term needs. Consisting of debt and equity, businesses use the money to operate their capital with an expectation to earn a return of stock appreciations, dividends, and interests into their investments. To acquire the pieces of machinery, buildings, lands, and other fixed assets, these borrowers raise funds by administering programs associated with capital funding such as increasing the capital through debt or stock issuance.

For special considerations, capital financing by debt can be increased by applying for loans from banks and other lending institutions. These loans will be recorded as liabilities that are in long terms and will be decreased into a loan as it was paid off gradually. The interest rates charged by the financial institutions will be considered as an expense and thus results in having lower pre-tax profits.

For business loans

Business loans are intended for businesses. As similar to the usual loans, this involves the establishment of a debt in which interest will be added during repayment. Also, there are various types of loans which include cash flow loans, business cash advances, microloans, invoice financing, asset-based financing, mezzanine financing, and bank loans.

As an overview, cash flow loans deal with unsecured transactions that are commonly used for the daily operations of small businesses. These are also not considered as conventional bank loans because instead of entailing a thorough credit analysis on a business, the lender assesses the capacity generated by the borrower’s cash flow. For the business cash advances, the lender would only lend money if the business agreed to add a certain cut from the credit card sales during repayment. This turns out not to be a loan because it involves trade between money and business assets.

Invoice financing is a way to help businesses improve their reinvestments in operations, pay their suppliers and employees, and improve their cash flows. In addition to this service, businesses require an additional percentage coming from the invoice amount as a borrowing fee. And lastly, asset-based financing provides structured term loans and working capital to business which is tenable by real estate, equipment, inventory, machinery, and accounts receivable.

For personal loans

A personal loan is another type of loan commonly provided for individuals who are borrowing money for their motives and purposes. This is the most usual service financial institutions could offer because any individual is allowed to avail it as long as he or she is in a stable financial situation.

Furthermore, personal loans are subdivided into various types including secured, unsecured, credit builder, vacation, wedding, debt consolidations, student, and line of credit loans. And among these types, secured and unsecured loans are the most prominent among financial companies.

As a rundown, secured loans are, literally, loans that are secured because of the collaterals the borrowers have agreed to pay as an alternative. These collaterals are the personal properties of the borrower for which will all be taken by the lender if he or she happens to fail the loan transaction. On the other hand, unsecured loans are a type of loan for which the borrowed money doesn’t have any back-up collaterals. Because of this, a higher rate of interest was added based on the credit scores the borrower has made for which then results in having a higher annual or monthly charge.

Conclusion

It is evident that money has greatly impacted the survival of today’s society; people’s activities are now associated with ways of how to obtain them fast and easily. Thankfully, with the help of financial institutions, people can survive despite being in the midst of a financial crisis. This Licensed Money Lender has allowed individuals to borrow a certain amount of money to cover their emergency expenses with only a minimal additional interest rate; and to know more about the system of these institutions, Visit Easy Credit.

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