Why Finance Is Needed
The money needed by a new business before it begins trading.
What is start-up capital?
Lily’s Local needs this to buy its first clothing items from suppliers.
What is stock / inventory?
Money put into the business by the owner, often from personal savings.
What is owner’s investment / owner’s capital?
A lump sum borrowed from a bank and repaid with interest over time.
What is a bank loan?
Sole traders and partnerships cannot use this source of finance.
What is selling shares?
Businesses may need finance to buy machinery, vehicles, buildings, or IT equipment.
What is capital expenditure / fixed assets?
Rent, wages, utilities, and restocking are examples of this once a business begins trading.
What are operating expenses / day-to-day costs?
Profit from previous years that is reinvested into the business.
What is retained profit?
An agreement allowing a business to spend more than it has in its current account.
What is a bank overdraft?
A business needing only a small amount for a temporary cash-flow problem might choose this flexible source.
What is a bank overdraft?
This type of finance is needed to pay for daily costs such as wages, utilities, and raw materials.
What is working capital?
These finance needs last less than one year and may include paying suppliers or covering cash-flow problems.
What are short-term finance needs?
A business raises money by selling machinery, land, buildings, or old stock it no longer needs.
What is the sale of unwanted assets?
A method where a business uses an asset without owning it and pays regular fees.
What is leasing?
A large business may have more finance options because lenders and investors see it as less risky.
What is size of the business?
A business may need finance to enter new markets, open new branches, or increase output.
What is growth / expansion?
These finance needs last more than one year and may include buying buildings or expanding into new countries.
What are long-term finance needs?
This arrangement allows a business to sell an asset for cash but continue using it by renting it back.
What is sale and leaseback?
A method where a business buys an asset through instalments and owns it after the final payment.
What is hire purchase?
A business with high existing debt may struggle to borrow more money.
What is existing lending / existing debt?
If a business does not replace outdated machinery, production may slow down, costs may rise, and quality may fall.
Why might a business need finance to replace fixed assets or invest in new technology?
A business with poor working capital may be unable to pay day-to-day expenses and could eventually fail.
What is a cash-flow problem?
One disadvantage of using retained profit is that the money cannot be used for other purposes or paid to owners.
What is opportunity cost?
A source of finance where many individuals contribute small amounts, often through websites, in return for rewards or early access.
What is crowdfunding?
StyleWise has €22,000 retained profit and needs €20,000 for equipment. This is likely the best source because it avoids interest and debt.
What is retained profit?