What are some forms of Financing Effects?

Financing effects are special kinds of considerations made for the companies or individuals who are weaker in terms of finances and may find it hard to obtain debt from the markets. The intention of financial effects is to help companies and individuals mitigate the financial burdens that may arise from time to time.

Here are some prominent forms of financing effects.

Subsidized Loans

In case of a subsidized loan, the lender pays the interest portion of the loan, reducing the burden of the borrower who may find it hard to pay back the interests on a loan taken for a certain reason, such as undergraduate studies or buying a home.

  • Government banks of central, state and local levels offer subsidized loans to borrowers at a very low interest or those that have no interest at all.

  • Subsidized loans can also be offered to economically weaker individuals for numerous reasons. The most common lender of subsidized loans is the government, but non-governmental organizations may also offer subsidized loans with collaboration of banks and financial firms.

Credit Linked Capital Subsidies

This is a type of upfront capital subsidy offered by the government to SMEs. In India, the upfront capacity paid is equal to 15 per cent of the project. Other governments in various parts of the world offer capital subsidies of various levels.

The idea of these subsidies is to help the entrepreneurs to get started on projects that need substantial investments. India’s credit linked capital subsidy offers discount to projects that have value up to 1 crore.

Special Tax Benefits

Governments may also offer various tax benefits to individuals and companies under many schemes in both central, state or local levels.

  • In case of tax benefits, the income or corporate taxes may be reduced or completely removed to help the entities become more profitable and resilient in their businesses.

  • Special tax benefits may be offered in corporate loans and individual incomes, and it may vary from person to person or company to company depending on the income and profits respectively.

Investment Incentives

Governments can also pay investment incentives under various categories to eligible firms in order to help them finance their firms at the outset.

  • Investment incentives are often subsidized, and they serve a wide variety of purposes.

  • These types of incentives to companies are more common in developing countries and they are offered at all levels of authorities.

  • Investment incentives are also offered to NGOs (Non-Governmental Organizations) at state and central levels in select categories of operations by the central and state governments.

Updated on: 10-Jan-2022


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