Personal Finance Methods and Tools Research Report 2022

Financing concept

Financing, Financing in English, refers to the currency transaction means adopted to pay more than cash or transfer of purchase money, or the monetary means adopted to raise funds for the acquisition of specific assets. Financing usually refers to the direct or indirect financing activities between holders of monetary funds and demanders. Financing in a broad sense refers to the economic behavior of funds flowing among holders to fill in gaps. It is a two-way interaction process of funds, including fund in (source of funds) and lend out (use of funds). Financing in a narrow sense refers to the one-way financing of funds.

Personal financing is mainly when there is a funding gap before and during the business, and financing is required at this time. Financing has different purposes. Due to the differences in the amount of funds, time, cost, etc. of different financing methods, operators must consider which financing method is most suitable for them.

Financing methods

Direct financing: commercial paper, direct receipt vouchers, stocks, bonds: funds, stocks, bankers’ acceptances, hedge funds, bank letters of credit

Indirect financing: certificate of deposit, bank credit, entrusted loan, financial lease: bank credit, commercial credit

Financing methods

Distance financing: represented by the United States, Germany, etc., and the securities market dominates

Relationship financing: Japan is the representative, and banks have close relationships with enterprises

Equity financing: without financial intermediaries, directly realize financing with the help of stocks, etc.

Debt financing: The enterprise raises funds through debt, and the fund supplier, as the creditor, enjoys the financing mode of recovering the principal and interest of the loan when it matures

Endogenous financing: the government or the company raises funds from within, including retained earnings such as shareholder equity, funds, and various forms of provident funds

Exogenous financing: the mode in which the government or companies raise funds from other external economic entities, including issuing stocks, bonds and financial leases, etc.

Financing Theory

MM theory: Under certain conditions, enterprise value has nothing to do with financing methods

Balance theory: the key to restricting enterprises from pursuing tax-free benefits or maximizing debts: the risks and costs of enterprises due to rising debt

The theory of control rights: while the financing structure of enterprises determines the distribution of corporate income and expenditure, it also determines the distribution of corporate control rights

Macmillan Gap Theory: There is a funding gap in the development process of small and medium-sized enterprises, and the demand for capital and debt is higher than the amount that the financial system is willing to provide

Asymmetric Information Theory: There is an information asymmetry between firms and investors

Long-term interaction hypothesis: Small and medium-sized financial institutions are generally regional, and long-term cooperation with local small and medium-sized enterprises reduces the risk of information asymmetry

SW model: Assuming information asymmetry between the bank and the borrower, if the bank raises interest rates, it will face the problem of adverse selection. The solution: implement credit rationing.

Methods and Tools

The most common personal financing methods and tools are financing from banks, which can be classified into non-bank financing and bank financing.

Personal non-bank financing

Personal loan/Loan from relatives and friends

Suitable for the crowd: People who have fixed income and fixed deposits, but only have temporary capital turnover difficulties.

Content features: If you have a good project and want to manage it, the first thing you think of is to borrow money from relatives and friends. This financing method is suitable for the initial stage of simple production and operation and capital accumulation with little capital and little risk. Compared with financial instruments, the procedures for borrowing money between relatives are simpler, and most do not require standardized contracts and high interest rates. It is recommended to actively propose the conditions for repayment of principal and interest for large-sum loans.

Pawn financing

Financing cost: monthly interest rate of 2.5%-3%, calculated on a daily basis from the second month onwards.

Suitable for the crowd: People who have valuable items and need money urgently in a short time.

Content features: Pawns used to be the source of income for declining families in the old society, and now, its doors are open to all those who are waiting for cash. As big as real estate cars, as small as cameras and rings, as long as the pawnbroker believes that the borrower has valuable things, they can get the urgently needed cash within an hour at the fastest. For the collateral, the pawnshop will inform the date of the final redemption. After this day, the things will be handled by the pawnshop itself. “Fast time, less procedures” is a major advantage of pawnshops.

Consumer finance company

Financing cost: no more than 4 times the central bank’s loan interest rate over the same period.

Content features: The purpose of establishing a consumer finance company is to provide new alternative financial services for individual customers who cannot be benefited by commercial banks, and to meet. Guaranteed, no collateral. The main scope includes consumer purchases of household appliances, house decoration, personal and family travel, weddings, education, etc. So far, only Bank of Beijing has applied to the China Banking Regulatory Commission to establish a consumer finance company. In order to prevent consumers from excessive consumption, the “Pilot Measures” stipulates that the balance of consumer loans issued by consumer finance companies to individuals shall not exceed five times the monthly income of the borrower, and the interest rate for such loans shall not exceed four times the central bank’s loan interest rate for the same period , In fact, compared with other short-term financing methods, the interest rate of 4 times is already a very high interest rate level in the same product, so it is suitable for financing for people with higher income.

Financing concept

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