Business Finance: Needs And Sources (Copy)
5.1.1 The Need for Business Finance
- Main reasons why businesses need finance
- Start-up capital: to purchase premises, equipment, inventory, and cover initial costs.
- Expansion capital: to grow operations, open new branches, or increase production capacity.
- Working capital: to pay day-to-day expenses (wages, suppliers, bills) when cash inflows are delayed.
- Research & development (R&D): to innovate and develop new products.
- Emergency finance: to handle unexpected events such as breakdowns or economic downturns.
- Short-term vs Long-term finance
- Short-term finance (less than 1 year): covers immediate cash flow needs, e.g. working capital.
- Long-term finance (more than 1 year): used for fixed assets and expansion, e.g. machinery, property.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
5.1.2 The Main Sources of Finance
- Internal sources
- Retained profit: profit reinvested into the business.
- Sale of assets: selling unused machinery, property, or vehicles.
- Owner’s savings: personal funds invested into the business.
- External sources
- Short-term sources
- Overdrafts: flexible borrowing from banks for working capital.
- Trade credit: suppliers allow delayed payments.
- Debt factoring: selling trade receivables for quick cash.
- Long-term sources
- Bank loans: repayable with interest over years.
- Debentures (bonds): long-term loans with fixed interest.
- Share issue (equity finance): raising funds by selling ownership shares.
- Venture capital: investors provide finance in exchange for equity and control.
- Short-term sources
- Alternative sources
- Micro-finance: small loans given to entrepreneurs in developing economies.
- Crowd-funding: raising finance online from many small investors.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Factors Influencing the Financial Choice
- Size and legal form of business:
- Sole traders may use owner’s savings or micro-finance.
- Public companies can issue shares.
- Amount required:
- Small amounts → overdraft, trade credit.
- Large amounts → bank loan, debentures, equity finance.
- Length of time:
- Short-term → overdraft, trade credit.
- Long-term → loans, debentures, shares.
- Existing debts:
- Businesses with high debt may struggle to borrow more.
- Risk and control considerations:
- Loans keep ownership but increase liabilities.
- Share issue dilutes ownership but avoids debt.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Exam Application – Recommending Finance Sources
- Start-up: owner’s savings, micro-finance, bank loan.
- Expansion: share issue (for companies), venture capital, long-term bank loan.
- Working capital: overdraft, trade credit, debt factoring.
- Small business in developing country: micro-finance, crowd-funding.
- Large established company: retained profit, share issue, debentures.
Quick Recap Keywords
- Finance needs: start-up, expansion, working capital, emergencies.
- Internal sources: retained profit, asset sales, savings.
- External sources: overdraft, loans, shares, venture capital.
- Alternative sources: micro-finance, crowd-funding.
- Choice factors: size, amount, time, existing debt, ownership.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course