Funding and financing are the terms are used often for business purposes. These terms might sound similar but are different from each other. Funding is a free service but, in financing, repayment is necessary. Every organization needs a certain amount of money to fulfill the requirements of the business. The required capital comes from these two processes, either through funds or finances. However, there are a few terms and conditions which apply to both.
Funding vs Financing
The main difference between funding and financing is that in funding, the money given is not to be paid back but with few conditions, whereas, in financing, the money needs to be paid back to the financing institution. Every organization requires a particular amount of money to run a business. It becomes important to introduce the money from time to time. Sometimes companies get funding from the government or some other organization. Sometimes they get financed via loans from banks. Funding and financing are the two terms used frequently in business.
Funding is the amount of money provided by the government or an organization for a specific purpose. Grants and donations are parts of funding. Funding doesn’t need to be paid back but with a contract containing terms and conditions. Government and charitable organizations are the sources of funding. There are Corporate Social Responsibility (CSR) programs and donations via the public which are included in the funding. Funding is more of a charity whereas financing is borrowing. Governmental subsidies, tolls, commercial activities, and capturing land values are all part of the funding.
Financing is the amount of money an organization takes as loans and has to be paid back along with a particular percentage of interest. Organizations are liable to pay the amount on time. Financing is by financial institutions like Banks, venture capitalists, angel investors, etc. Financing is used for personal purposes also. For example, if a person wants to buy a car, he can take a loan from the bank and repay it in EMIs(Equated Money Installments) where a small amount is transacted directly from the bank account.
Comparison Table between Funding and Financing
| Parameters of Comparison | Funding | Financing |
| Definition | Funding is the amount of money provided by government or a charitable organization for welfare purposes or startups. | Financing is the amount of money taken as loan from bank or venture capital. |
| Sources | Government and Philanthropists which include charitable organizations, subsidies | Banks, Cooperative Societies, Non Banking Institutions, etc. |
| Purpose | Welfare purposes like making roads, hospitals, startups etc. | Personal purpose |
| Interest | No interest | A certain percentage of interest |
| Receivers | Private companies, general public, etc. | Anyone who is capable of repaying with interest can apply for loan. |
What is Funding?
Funding is an amount of money provided by the government for the welfare of society. Government and charitable organizations give the amount without any interest but with terms and conditions. Donations made by the government and philanthropists are the sources of funding. The corporate sector’s programs like Corporate Social Responsibility(CSR) programs are used by them for investing in welfare programs.
When funding is done for startups, it is used in manufacturing products, sales and marketing, and development. Sometimes the third party is not involved in funding the startups and is funded by the founders completely. There are three types of funding and these are government grants, crowdfunding, and raises from investors. Crowdfunding is the most popular where a small amount from an individual is taken and combined with the small amounts of the money taken from other individuals raising the capital to a bigger sum together.
Funding is usually for the purposes related to research, business launch, and investment for startups. The funding could be less or in millions depending upon the need. The Funding is directly related to the development of society. For example, if the funding is for health and science, it will improve that particular area. Low funding affects the particular area.
What is Financing?
Financing is the term used when a particular source provides you with the sum of money for business purposes. Financial institutions like banks give loans to consumers, businesses, and investors to help them to achieve their objectives. Financing is important because it facilitates businesses or individuals to buy the products they need. However, the amount that could be given as a loan depends upon the type, requirement, and capacity to repay.
Financing is of two types, Debt Financing and Equity Financing. Debt financing is the one where you have to repay the amount taken as a debt whereas in equity financing, you don’t have to pay the amount back but, the lenders require some reward in return. Debt financing is risky because a large amount burdens the borrower and might lead to the collapse of capitalism. Equity financing has no such obligation.
Banks and venture capitals do financing for different purposes. Banks can give loans like house loans, car loans, education loans, etc. whereas, venture capital is usually used in startups. Venture capital is in the form of shares, stocks, royalties, etc.
Main Difference Between Funding and Financing
- Funding is the amount of money given by the government or charitable organization for a particular purpose whereas financing is the amount of money taken as a loan from Banks or venture capitals.
- Funding is always for larger purposes whereas financing could also be personal.
- Funding doesn’t need to be paid back but financing has to be paid back.
- There is no interest paid on funding whereas financing charges a certain percentage of interest.
- Funding can be collected from a group of people known as crowdfunding but, financing is done from Banks, venture capital, etc.
Conclusion
Funding and financing have a wide similarity in their denotations. Both the terms are used interchangeably in the business world. Funding is necessary for doing the financing activities. Funding is used for a larger purpose and financing can also be used for personal purposes. Both the terms need to be understood well for better use.
References
- https://www.sciencedirect.com/science/article/pii/S0304387821000067
- https://elibrary.worldbank.org/doi/abs/10.1596/978-1-4648-1272-9_ch10