Financial Lending: The basic concept of financial lending is the use of collateral to borrow money from banks and other lending institutions. Financial leverage is the capacity of an individual or organization to borrow a higher amount of money than its total assets. Financial leverage can be defined as a company’s or an individual’s ability to borrow funds that are more than their total assets. For instance, when you borrow money from a bank, you secure the bank’s position by pledging your property or other financial holdings as collateral. Also, it is seen that the effect of financial leveraging on company investment is relatively high for large information asymmetrical companies.
There have been many theories and research done on the theory of firm investment. One of them is the theory of institutional investment. This theory suggests that firms tend to concentrate their assets in their fixed assets such as fixed earnings funds and safe deposits in bank vaults as they tend to be less influenced by changes in stock market prices and are therefore able to secure their interests better. According to this theory, firms invest in safe ventures as they are less likely to experience shocks to their assets due to changing external circumstances. However, there are also firms that do not adopt this approach as they are more exposed to shocks due to their responsiveness to external factors.
Another theory of firm investment is based on the theory of market competition. This theory suggests that firms that can successfully overcome market competition will be able to attract capital because of their ability to create competitive differentiation. In addition, firms that can effectively manage their fixed capital base through the use of diversification strategies are also preferred by financial institutions and banks because they reduce their risk exposure. On the contrary, if a firm is unable to penetrate the capital market, then its ability to increase its fixed earnings will be limited. As capital flows are affected by market forces, these firms have to constantly find ways to raise capital. Diversification strategies help firms to ride out market fluctuations by providing them an opportunity to increase their earnings despite fluctuating markets.
One of the most popular theories on economic freedom and venture capital is the theory of firm economy. This approach defines firms as groups instead of individuals. This means that firms are made up of groups of workers rather than an individual making decision for himself. As groups, they have the same goals, but due to their differences in skills, they come into different shapes when operating. For this reason, they find ways to complement each other through the employment of financial, technological and organizational resources.
The last theory of economic freedom and venture capital pertains to cash flow. Cash flow is the difference between the amount of cash flowing in and the total amount due at the end of a month. A low cash flow business will always be confronted with a situation of over financing. When cash flow is high, the business has the capability of generating new customers and enhancing production. A high flow firm will, on the contrary, have problems generating new customers and decreasing production if its cash flow is low.
All the three theories on economic freedom and venture capital are built on the assumption that firms are characterized by different characteristics. Firm size, the location of the firms, the industry they belong and the level of flexibility of their owners and managers determine the nature of their operations. In the end, though, the characteristics of the firm remain the same. They depend more on human factors than anything else.