Finance for Dummies | Corporate Finance - basic terms | Finance for Beginners | Personal Finance

Hey, everyone. The article is about finance. Now finance, the word itself is very scary. And a lot of you say that we don't understand finance.

Can you write a blog about covering the basic terms of finance?

This is a very, very interesting topic and I'm going to simplify it. So I will tell you two stories.

And if you listen to these two stories intently and do a little bit of further research, you will be able to demystify a lot of things related to finance.

So essentially, finance can be categorized into a wide variety of domains, but for the purposes of our discussion, we are going to categorize it into two domains. Corporate finance and personal finance are the first and second, respectively.

So I'm going to tell you one story each across these two domains. So let's start with corporate finance first and let me start with the story. So the story, or the exercise is that let's imagine that, You are an entrepreneur and you are starting your own venture.   Congratulations!

What do you need most urgently? for your company Finance

You will say that, OK, we need an idea and what are the things that you would need?

The second most important thing would be that, hey, I have an idea, but I need to develop my product. I need to set up my office or I need to hire my first employees.

So what do you need? You need money. That is the precise thing that you need and what are your options in terms of getting this money in the initial or inception stage of your venture?

So the first option is called FFF, which means friends, family and fools. They are called friends, family and fools because they don't look at your idea, they just literally give you money.

For example, if you ask your friend that I have started a venture and we have been friends since childhood, would you want to give me like a thousand dollars so that I can start my product development?

Your friend will say, you know what? I don't even want to hear the idea that I will just give you the money. So it's a foolish way of investing, but it's a very heartfelt way of investing. So this is called the FFF or friends, family and fools way of financing. This is your number one option. 

What is your number two option? 

Number two is something called Bootstrapping in Finance

Bootstrapping sounds very fancy, but bootstrapping literally means that essentially you have your own savings and you put that money into your venture.

For example, a majority of the startups that I have built, those have been bootstrapped. We have not externally raised funds, not because we can't, but at this stage we don't want to. And I'll explain to you the reason why on point number three.

So the third way in which you can raise money is called equity financing. This is when things start to get a little complicated.

So let me explain what equity financing means.

So imagine that this is your company. This is like a hundred percent of your company.And what you do is take a piece of this pie and literally slice it out. So let's imagine this is going to 25 percent of your company and then you sell it off to different investors.

Now, this could be your friends, This could be VC funds, this could be private equity funds, But bottom line is that you lose a certain part of your company and in return, what do you get? You get money.

Do you also lose everything else?

that 25% of your business is being lost?

No, there are other factors as well. You forfeit your freedom as well. Freedom in the sense that, for instance, when you welcome an outside investor, he or she will start offering you a lot of suggestions. Due to the fact that they are now your investors, you must accept that.

The fact that there are so many enthusiastic investors can be both positive and terrible. They get along really, really well with you. So it's a match made in heaven. But if you end up onboarding a bad

investor, they can literally derail your entire company. So it's a risky proposition and that's

an equity way of raising money for your company.

Now, what is the next term?

Next term is debt equity. in finance

 If there is equity, there is always debt and equity. Debt, then, means that, say, you own your entire business. I don't want to sell any of my company, 

What then can I do?

You only need to go get a loan, and that's all. So a loan is called a debt. Therefore, you physically visit a bank with your business, and the bank then approves your loan.

You said to the bank, "Hey, here is one crore rupees for you; start your venture." Hey, I'll start making payments in this amount starting this month. So that is how you finance your business through debt..

So I explained these four times very, very intuitively. So always ask a question that, hey, what is debt?

Imagine yourself starting a company and start implementing these concepts. Now, of course, there is a much more nuanced understanding to it, but we are keeping this blog for beginners.

So I'm not going to get into more specific details here. So let's move on to part 2.

Let's say that you need to grow your business in the second part of the tale.

You established the business, obtained the funding, and invested that money. You created the item.

That product is doing properly, however you want to actually attain hundreds of thousands and hundreds of thousands of humans. So you're in that growth level of your business enterprise.

What are your alternatives now? for your Business or finance

So you'll say that I'm searching out a seed spherical investment. This is once more a finance time period which you have to be conscious of. So seed spherical of investment way that, hey, it is up to two million greenbacks. Your product is doing properly within side the market

and it is making a little bit of cash, however it is now no longer fostering natural increase.

Swiggy and Zomato commenced out, they have been dropping cash. And up till closing year, they have been nevertheless dropping cash on each order that they used to deliver.

So what do they want to do?

They nevertheless want hundreds of thousands and hundreds of thousands of bucks extra. So that element is known as seed cash.

So it also includes up to 2 million greenbacks.

And typically that is the primary spherical of outside VC (mission capital) funding that normally happens.

This is the time whilst fairness investments come into the picture, if fairness investments are made right here, actually while you're beginning out. This is typically accomplished via way of means of whom?

Angel traders, now no longer VC traders. So that is known as the growth level.

And right here you typically get a VC fund who pour in million greenbacks or up to 2 million greenbacks typically for your business enterprise. This is known as seed cash due to the fact that is wherein the seed is planted for increase.

After this, as your business enterprise begins off evolving depicting extra increase and begins off evolving getting extra sales and profits, you circulate to collect investment.

Now collection investment, you may have heard of collection A, collection B, collection C. All it surely is that an increasing number of VC budgets come into your mix.

They begin pouring in extra cash.

Some time It is the identical VC, from time to time there is typically an aggregate of VCs who will pitch in with a variety of cash.

So while you hear these kinds of phrases that a business enterprise has come to be a unicorn, basically what's occurring is that a variety of humans are pouring cash in that business enterprise.

It's now no longer as though that their stability sheets are that right here are a thousand million greenbacks for your financial institution account. No, it does not paint in that manner.

So that is the distinction among seed investment and collection investment. So now the business enterprise has expanded. Congratulations.

Your enterprise is doing splendidly properly. Now, what you sense is which you realize what, enough

with the Indian market, I actually have already captured it. Let me know, pass overseas and try and seize the world, come to be just like the Roman emperor who desires to seize everything.

So what's that level known as?

This is known as a huge level increase.

And right here companies typically execute varieties of alternatives. One is known as issuing company bonds. And the second one and the maximum thrilling element is launching their very own IPO.

So allow me to provide an explanation for each very, very quickly. So company bonds are what? This is part of a debt financing. Again, you are now no longer dropping any manipulation or a part of your business enterprise. You're simply taking extra loans. But those at the moment are issued in a structured manner via the means of the organization due to the fact your business enterprise grew, it became a small participant. It has become like a huge, huge participant over time. And then you definitely get the electricity to trouble bonds within side the public market.

So you are issuing bonds. And those bonds are then analyzed via means of specific credit score score agencies and they'll examine and supply scores for your bonds. Then you could boost public cash from that bonds or predominant companies or other

agencies can pour in cash and come up with loans.

So that's a company bond form of a component does not sound terrific thrilling due to the fact IPOs sound without a doubt thrilling.

So let's communicate about IPOs.

So IPOs are known as preliminary public offerings.

Now, your first query could be, can they now no longer simply maintain doing this and produce an increasing number of VC traders and maintain developing their business enterprise, making extra cash? No.

Because even traders, for example, after I spend money on companies, even I could want an go out to make cash from the investments that I actually have made.

So the bulk of the instances, and that is a arguable statement, that majority of the instances whilst IPOs are released, particularly for loss making companies, it is accomplished with the intent

of giving VC traders and going out in order that time period is known as go out.

So this is one of the number one motives why IPOs are released. Another cause why an IPO is released is to construct the emblem and get visibility for the firm. Now, this could be very without problems defined if I ask you an easy query. So could you pass and paintings with Facebook or could you pass and paintings at a totally excessive startup that you have not heard of?

You maximum possibly are going to paintings with Facebook due to the fact Facebook is an indexed business enterprise. You keep studying it. There is a lot of scrutiny and Facebook has that emblem. So you've got this huge emblem going for you. It turns smoothly as a way to recruit higher talent. So those are the number one reasons why IPOs are released.

Now, of course, I can write a separate weblog on IPO altogether. But this became the basics.

So I wish you learnt plenty from this company tale. In the following part of this, I'm going to inform you of a private finance tale so that you can assist you in recognizing the fundamentals of private finance.