The Need for Business Finance (CIE IGCSE Business)

• All businesses need finance to get started, allow them to grow and fund their continuing activity
• Businesses often call the money needed to start and operate 'capital'
  

Diagram Explaining why a Business Needs Finance

The finance department manages the finances and ensures that the business is able to remain liquid

Starting a business

• Start-up capital is the finance needed by a new business to pay for fixed assets and current assets before it can begin trading
• A business usually estimates the amount of start-up capital they need in the business plan
• Many small new businesses will get a start-up loan to cover these initial costs

Expanding a business

• As a business grows more finance may be needed for capital expenditure
  • It may require more equipment, buildings, IT infrastructure or vehicles which will allow the business to increase output
    
    
• If a business wants to grow by developing a new product, it will need to spend large amounts of capital on 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 as they are investing heavily in Artificial Intelligence (AI) and innovation of new products
    

Working capital

• Finance is required for working capital which is spending on raw materials or or wages or utilities
• Having a steady flow of working capital is essential to keep the business operational
  • Without working capital, the business would be unable to cover its day to day expenses
  • It may suffer cash-flow problems which could lead to business failure

• In recent years new forms of business funding have become available to business and can provide the funding required
• Two of the most common are crowdfunding and microfinance 
  
  

An Explanation of Crowdfunding and Microfinance

Source	Explanation	Advantage	Disadvantage
Crowdfunding	Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter   These funds are voluntary ‘donations’ and don’t have to be return or paid a dividend   E.g. Flow Hive is a beekeeping system that was successfully funded on Indiegogo in 2015. The campaign raised $12.2 million from 38,470 backers	The Business has to reach a target amount before any funds are released i.e they will not receive any funds even if they are just a few hundred £s short by the selected funding date Investors are often attracted by incentives such as a sample or early access to a product	Businesses need to provide a persuasive business plan to convince individuals to invest in their product, as they will be competing with many other projects online
Microfinance	Small-scale financial support for small start-up businesses in less developed countries Finance is available for people looking to start or expand small businesses, e.g. loans and insurance Some institutions are specifically aimed at women to help them to become more self-sufficient	Provides access to credit for people who would not normally have access to it, allowing them to start or expand their businesses and increase their income The financial institutions are social enterprises and can provide advice and guidance over the long term	Only small loan amounts may be offered, which may limit the choice of start-up options for the new business owner Business owners may get into excessive debt if they have access to loans from more than one microfinance institution and little experience of a new start-up