Tuesday, May 21, 2024

Financing the right way!

Any business needs funding to start with. However profitable, most start-ups and corporations need funds to venture into new areas and expand their business. And these corporates or entrepreneurs approach the financial institutions that source their funds using various financial instruments, including the wholesale fund, which is nothing but large deposits apart from the regular savings or demand/time deposits. These institutions source this additional fund from various methods and use it either for operational purposes or to lend at a profitable interest rate.

The money multiplier effect that multiplies the number of deposits available with the financial institution is of great help to create money and keep the market boosted through the regular circulation of money. Any business venture approaches the banks first due to the trust factor and lesser interest rates than other financial institutions. The loan lending mechanism of the banks is an asset rather than a liability because the loans earn the bank’s interest, and the difference between the interest lent and the interest earned is the bank’s profit.

Furthermore, it is to be recorded that the banks’ operational costs are to be met from this additional gap in the fund only. Therefore, a bank always tries to keep the interest lent on savings deposits less than the interest charged on the loans. As a banker, the primary focus is to increase its assets, which means lending more loans to showcase more assets on the balance sheet, thus making more profit.

Meeting the need

The newly starting ventures or the established businesses all are aware of the wholesale fund sources that banks receive. Therefore, with the need, these businesses approach the banks to get more loans. Apart from the banks, other lending institutions and financial institutions offer little extra interest rates due to the lesser availability of the deposits. Thus, the need for wholesale funds arises. Some rich investors will be ready to invest huge amounts of money but are scared of the risks of unstable market conditions. Such potential clients can be tapped by these financial institutions, who turn out to be their wholesale investors bringing in wholesale funds. This is the best opportunity for wholesale fund managers to catch hold of the funds and make profits.

Understanding more better

Like the difference between the wholesale and retail markets, the initial investment is higher in a wholesale fund. In contrast, during the management of the fund, one incurs a little charge. On the other hand, in the retail fund, the management fee is slightly higher compared to the earlier one. Therefore, depending on the fund in hand and various other factors, one must decide which fund to go to, either wholesale or retail.

Making the wise decision!

Be the wisest person while deciding to finance any business. Is it a long-term or short-term business, and what kind of fund options are available? These things go way ahead in gaining profits for the financial institution and the best options for the investors and companies that take loans. Finding the right financial company is, of course, a challenge but not an impossible task. To be more calculative and to get the perfect deal, get the best financial instrument charging relatively lesser interest and for more duration, which helps in giving more flexibility in paying back the loans. 

Also, the financial institutions should cross-verify the collateral provided before the loan is approved. With instant loan instruments becoming popular, competition among financial companies is also increasing. Therefore, offering ease of doing business is the key factor to getting more business.

Pooja Ranavat

Pooja Ranavat is a fashion blogger and always love to write content related to fashion, pets, business and technology.