IGCSE Business Studies - 5.1.1 The Need for Business Finance

This section explores why businesses require finance, differentiating between short-term and long-term needs. Understanding these needs is crucial for effective business planning and growth.

Short-Term Finance Needs

Short-term finance is needed to cover immediate costs and obligations. These needs typically arise within a year.

Examples of Short-Term Finance Needs

• Working Capital: The funds needed to finance day-to-day operations, such as purchasing inventory, paying wages, and covering expenses.
• Payment for Suppliers: Money required to pay suppliers for goods or services received on credit.
• Immediate Expenses: Covering unexpected or urgent expenses like repairs or marketing campaigns.
• Stock Purchases: Funding the purchase of raw materials and finished goods to meet customer demand.

Sources of Short-Term Finance

Source of Finance	Description
Trade Credit	Goods or services purchased now and paid for at a later date.
Overdraft	A bank facility that allows a business to spend more money than it has in its account, up to a pre-agreed limit.
Short-term loans	Loans from banks or other lenders with a repayment period of less than a year.
Accrued Expenses	Expenses that have been incurred but not yet paid (e.g., salaries owed).
Working Capital	The difference between a business's current assets and current liabilities.

Long-Term Finance Needs

Long-term finance is required for investments that benefit the business over a period of more than a year. These needs are typically associated with significant capital expenditures.

Examples of Long-Term Finance Needs

• Purchase of Assets: Funding the purchase of fixed assets like buildings, machinery, and equipment.
• Expansion: Financing the expansion of the business, such as opening new branches or entering new markets.
• Research and Development: Investing in new products, technologies, or processes.
• Takeover of Other Businesses: Acquiring control of another company.

Sources of Long-Term Finance

Source of Finance	Description
Share Capital	Money raised by selling shares in the business to investors.
Long-term loans	Loans from banks or other lenders with a repayment period of more than a year.
Retained Earnings	Profits that the business has made and kept within the company, rather than distributing them to shareholders.
Capital Grants	Money received from government or other organizations for specific investment projects.
Depreciation	A non-cash expense that reflects the decline in value of assets over time.

Comparing Short-Term and Long-Term Finance

The table below summarizes the key differences between short-term and long-term finance.

Feature	Short-Term Finance	Long-Term Finance
Repayment Period	Less than one year	More than one year
Purpose	Day-to-day operations, immediate expenses	Significant investments, expansion
Risk	Generally lower risk	Generally higher risk
Cost	Can be more expensive (e.g., overdraft interest)	Can be less expensive (e.g., long-term loan interest)

Choosing the right type of finance is vital for a business's success. Businesses must carefully consider their needs and the available options to ensure they have sufficient funds to operate and grow.