Funding is the act of providing
resources
Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon their a ...
to finance a need, program, or project. While this is usually in the form of
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.
Sources of funding include
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), ...
,
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
,
donation
A donation is a gift for charity, humanitarian aid, or to benefit a cause. A donation may take various forms, including money, alms, services, or goods such as clothing, toys, food, or vehicles. A donation may satisfy medical needs such as blo ...
s,
grants
Grant or Grants may refer to:
Places
*Grant County (disambiguation)
Australia
* Grant, Queensland, a locality in the Barcaldine Region, Queensland, Australia
United Kingdom
*Castle Grant
United States
* Grant, Alabama
*Grant, Inyo County, C ...
,
savings
Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
,
subsidies
A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...
, and
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
es. Fundings such as donations, subsidies, and grants that have no direct requirement for
return of investment
Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably ...
are described as "soft funding" or "
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
". Funding that facilitates the exchange of equity ownership in a company for capital investment via an online funding portal per the
Jumpstart Our Business Startups Act
The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations. It passed with bipartisan support, and was signed into ...
(alternately, the "JOBS Act of 2012") (U.S.) is known as
equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...
.
Funds can be
allocated for either short-term or long-term purposes.
Economics
![Grafik 220](https://upload.wikimedia.org/wikipedia/commons/a/ab/Grafik_220.jpg)
In economics funds are injected into the market as capital by lenders and taken as loans by borrowers. There are two ways in which the capital can end up at the borrower. The lender can lend the capital to a
financial intermediary
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...
against interest. These financial intermediaries then reinvest the money against a higher rate. The use of financial intermediaries to finance operations is called
indirect finance
Indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary. This is different from direct financing where there is a direct connection to the financial markets as indi ...
. A lender can also go to the
financial market
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
s to directly lend to a borrower. This method is called
direct finance
Direct finance is a method of financing where borrowers borrow funds directly from the financial market without using a third party service, such as a financial intermediary. This is different from indirect financing where a financial intermediary ...
.
Purpose of Funding
Research funding
Research funding is funding used for
research-related purposes. It is most often used to describe funding in the fields of technology or social science. The allocation of funds are usually granted based on a per project, department, or institute basis stemming from scope of the research or project.
Research funding
Research funding is a term generally covering any funding for scientific research, in the areas of natural science, technology, and social science. Different methods can be used to disburse funding, but the term often connotes funding obtained thr ...
can be split into commercial and non-commercial allocations. Research and development departments of a corporation normally provide commercial research funding. Whereas, non-commercial research funding is obtained from charities, research councils, or
government agencies
A government or state agency, sometimes an appointed commission, is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an administratio ...
. Organizations that require such funding normally have to go through competitive selections. Only those that have the most potential would be chosen. Funding is vital in ensuring the sustainability of certain projects.
Launch a business
Entrepreneurs
Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values th ...
with a business concept would want to accumulate all the necessary resources including capital to venture into a market. Funding is part of the process, as some businesses would require large start-up sums that individuals would not have. These start-up funds are essential to kick-start a business idea, without it, entrepreneurs would not have the ability to carry out their concepts in the business world.
Uses on investment
Fund management companies gather pools of money from many investors and use them to purchase
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
. These funds are managed by professional investment managers, which may generate higher returns with reduced risks by asset
diversification
Diversification may refer to:
Biology and agriculture
* Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes
* Agricultural diversification involves the re-allocation of some of a farm's resources to n ...
. The size of these funds could be as little as a few millions or as much as multi billions. The purpose of these funding activities is mainly aiming to pursue individual or organization profits.
Methods of Funding
Government Grants
Government could allocate funds itself or through
government agencies
A government or state agency, sometimes an appointed commission, is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an administratio ...
to projects that benefit the public through a selection process to students or
researchers
Research is " creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of evidence to increase understanding of a topic, characterized by a particular attentiveness ...
and even organizations. At least two external peer-reviewers and an internal research award committee review each application. The research awards committee would meet some time to discuss shortlisted applications. A further shortlist and ranking is made. Projects are funded and applicants are informed. Econometric evidence shows public grants for firms can create additionality in jobs, sales, value added, innovation and capital. For example, this was shown to be the case for large R&D grants, as well as smaller public grants for the tourism firms or small and medium sized firms in general.
Crowdfunding
Crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
exists in mainly two types, reward-based crowdfunding and equity-based crowdfunding. In the former, small firms could pre-sell a product or service to start a business whereas in the latter, backers buy a certain amount of shares of a firm in exchange of money. As for reward-based crowdfunding, project creators would set a funding target and deadline. Anyone who is interested can pledge on the projects. Projects must reach its targeted amount in order for it to be carried out. Once the projects ended with enough funds, projects creators would have to make sure that they fulfill their promises by the intended timeline and delivery their products or services.
Raise from investors
To raise
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
, you require funds from investors who are interested in the
investments
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
. You have to present those investors with high-return projects. By displaying high-level potentials of the projects, investors would be more attracted to put their money into those projects. After a certain amount of time, usually in a year’s time, rewards of the investment will be shared with investors. This makes investors happy and they may continue to invest further. If returns do not meet the intended level, this could reduce the willingness of investors to invest their money into the funds. Hence, the amounts of financial incentives are highly weighted determinants to ensure the funding remains at a desirable level.
Self-Organized Funding Allocation
Self-organized funding allocation (SOFA) is a method of distributing
funding
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
for scientific
research
Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of evidence to increase understanding of a topic, characterized by a particular att ...
. In this system, each researcher is allocated an equal amount of funding, and is required to anonymously allocate a fraction of their funds to the research of others. Proponents of SOFA argue that it would result in similar distribution of funding as the present grant system, but with less overhead. In 2016, a test pilot of SOFA began in the Netherlands.
Securing loans
A company or an individual may secure a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...
to get access to capital. Often borrowers must use a
secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, an ...
where assets are pledged as collateral. If the borrower defaults, ownership of the
collateral
Collateral may refer to:
Business and finance
* Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan
* Marketing collateral, in marketing and sales
Arts, entertainment, and media
* ''Collate ...
reverts to the lender. Both tangible and
intangible assets
An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets (machinery, buildings, etc.) and finan ...
can be used to secure loans. The use of IP as collateral in IP-backed finance transactions is the subject of a report series at the
World Intellectual Property Organization
The World Intellectual Property Organization (WIPO; french: link=no, Organisation mondiale de la propriété intellectuelle (OMPI)) is one of the list of specialized agencies of the United Nations, 15 specialized agencies of the United Nation ...
.
Withdrawal of funding
Withdrawal of funding, or defunding, occurs when funding previously given to an organisation ceases, especially in relation to Governmental funding.
Defunding could be as a result of a disagreement or failure to meet set
objective
Objective may refer to:
* Objective (optics), an element in a camera or microscope
* ''The Objective'', a 2008 science fiction horror film
* Objective pronoun, a personal pronoun that is used as a grammatical object
* Objective Productions, a Brit ...
s. An example that explains the withdrawal of funding in this case is that of
President Trump
Donald John Trump (born June 14, 1946) is an American politician, media personality, and businessman who served as the 45th president of the United States from 2017 to 2021.
Trump graduated from the Wharton School of the University of Pe ...
's decision to stop funding the
World Health Organization
The World Health Organization (WHO) is a specialized agency of the United Nations responsible for international public health. The WHO Constitution states its main objective as "the attainment by all peoples of the highest possible level of h ...
(WHO) over alleged Coronavirus mismanagement.
See also
*
Foundation (non-profit)
A foundation (also a charitable foundation) is a category of nonprofit organization or charitable trust that typically provides funding and support for other charitable organizations through grants, but may also engage directly in charitable act ...
*
Investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
**
Investment fund
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...
*
Crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
*
Peer-to-peer lending
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and ...
*
Research funding
Research funding is a term generally covering any funding for scientific research, in the areas of natural science, technology, and social science. Different methods can be used to disburse funding, but the term often connotes funding obtained thr ...
*
Seed money
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' su ...
*
Micro finance
Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings ...
*
Mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
*
Trust Fund
A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...
*
Equity fund
A stock fund, or equity fund, is a fund that invests in stocks, also called equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stock, with some amount of cash, which is generall ...
*
Intangible asset finance
References
{{Authority control
Business terms
Fundraising