FINANCE vs FINANCING

Finance is the process of exchanging cash flows between one period and another through the use of financial contracts. The cost of this exchange is the interest paid by the borrower. The longer the period, the higher the interest rate. By definition, interest will always be paid in the future. The only possible cost at this time is fees. A typical example is a simple interest loan, where the lender lends the borrower a sum of money - the principal - in exchange for periodic interest payments until a future date when the borrower repays the lender the full principal amount. Another example is a fully amortizing loan, where the lender pays back the loan in the form of fixed payments over the life of the loan, including decreases in the amount of interest and increases in the amount of principal. Often, fees are added to the payment as well.

Financing is a useful business tool. A business is an organization that generates profits for its owners primarily by selling goods or services to consumers and employing workers. Others would say that businesses exist primarily to keep people busy-that is, to provide jobs. With financing, a business can capitalize on its operations by borrowing money to use for investments to increase future revenues. The higher revenues are then used to pay off future debt and interest. This shifts the cost of capital, from the less productive present to the more productive future, which allows the business to earn profits faster and earn more profits than a business that operates without debt.