The Need for Finance (Edexcel IGCSE Business)

Why do businesses need finance?

Spec point — 3.1.1 · The need for finance

• Business finance is also known as capital
• It is required for a range of reasons

Reasons why business finance is needed

Business finance is needed to meet short-term and long-term needs and can be used to set up or grow a business

Short-term finance needs

Spec point — 3.1.1 · The need for finance: • short-term needs

Short-term finance needs

• Finance is needed by business to meet short-term and long-term liabilities and to fund day to day activities

• Short-term sources of finance are needed to meet day to day costs such as paying bills, suppliers and employee wages

  • They are likely to be relatively small amounts and are rarely needed beyond a year

• Where revenue from sales does not cover these expenses sources such as overdrafts or trade credit may be useful

Long-term finance needs

Spec point — 3.1.1 · The need for finance: • long-term needs

Long-term finance needs

• Longer-term sources of finance are needed to fund the purchase of non-current assets such as buildings and other types of capital resources or to acquire other businesses

  • These are likely to be large sums that may be required for a significant period of time

• Where retained profit is not sufficient to meet these needs businesses may consider taking out long-term loans, mortgages or raising share capital

Start-up finance

Spec point — 3.1.1 · The need for finance: • to start up or expand.

Start-up finance

• Start-up finance is needed by a new business to pay for fixed assets and current assets such as stock before it can begin trading

• The amount of start-up finance a business needs is identified in the business plan

  • Owners often invest their own capital into a new business
  • Some small new business owners obtain a start-up loan to cover initial costs

Financing business expansion

Spec point — 3.1.1 · The need for finance: • to start up or expand.

Financing business expansion

• As a business grows more finance may be needed to purchase capital equipment

  • It may require more machinery, buildings, IT infrastructure or vehicles which help the business to increase output

• If a business wants to grow by developing new products large amounts may need to be invested in research and development (R&D)

  • E.g. Apple's annual research and development expenses for 2023 were $29.915 Billion, a 13.96% increase from 2022 to invest heavily in Artificial Intelligence (AI) and product innovation

Exam Hint You are likely to be asked to identify suitable sources of finance for a business

Consider carefully the reasons why finance is needed and only recommend sources that are appropriate to meet business needs

• Is it to meet short- or long-term business needs?
• Is the business a start-up or is it established and looking to grow?

In each case it is likely that different sources of finance will be needed