Business Finance Needs and Sources

Short-term needs (less than a year):

• Day-to-day cash flow (covering wages, rent, supplier payments).
• Stock build-up before busy seasons.
• Bridging temporary cash gaps.

Long-term needs (more than a year):

• Buying fixed assets (factories, machinery, vehicles).
• Expansion (new branches, new countries).
• Research and development.
• Acquiring other businesses.

Match the finance to the need. Use SHORT-TERM finance for short-term needs (cash gaps, temporary inventory). Use LONG-TERM finance for long-term needs (factory, equipment with 10-year life). Mismatching causes cash-flow problems.

Cambridge tip. Mark scheme expects students to identify the time-frame of the need AND choose appropriately.

Retained profit. Profit kept in the business rather than distributed as dividends.

• Pros: NO interest cost, no debt, no loss of control.
• Cons: limited by past profitability; doesn't help start-ups.

Sale of assets. Selling unused machinery, vehicles, property.

• Pros: turns idle assets into cash; no debt.
• Cons: limited; once sold, can't be sold again.

Owner's contribution. Owner adds personal savings.

• Pros: no interest; full control retained.
• Cons: limited by owner's wealth.

Cambridge tip. Internal sources don't require external approval — but are LIMITED by what the firm has. Many growing firms need external sources too.

Bank loan. Borrowed amount, repaid in instalments with interest, over a set term.

• Pros: large amounts available; clear repayment schedule.
• Cons: interest payable; collateral often required; covenants restrict actions.

Overdraft. Bank facility allowing the firm to spend more than it has, up to a limit.

• Pros: flexible; interest only on the negative balance.
• Cons: high interest rate; bank can demand repayment; not for long-term needs.

Share issue. Selling shares (Ltd or plc) to investors.

• Pros: large capital; no repayment obligation; no interest.
• Cons: dilutes ownership; investors expect dividends and capital gains; for plcs, regulatory cost.

Leasing. Paying regular fees to USE an asset.

• Pros: preserves cash; predictable payments; easy to upgrade.
• Cons: total cost > buying outright over the long run.

Trade credit. Suppliers let the firm pay later (30-90 days).

• Pros: free short-term financing of working capital.
• Cons: limited duration; can damage supplier relationships if abused.

Government grants. Money from government, often tied to specific activities (regional development, R&D, exporting).

• Pros: typically don't have to repay.
• Cons: tied to conditions; competitive to obtain.

Debentures / bonds (for plcs). Long-term loans from the public, repaid with interest.

Cambridge tip. Mark scheme rewards multiple specific external sources, not just 'a bank loan'.

Leasing. Pay regular fees to USE an asset that someone else OWNS. At end of lease, return or buy outright.

Buying. Pay a one-off price (or a loan-funded price) to OWN the asset.

Lease pros.

• No large upfront capital outlay.
• Cash preserved for other uses.
• Predictable payments smooth budgeting.
• Often includes maintenance.
• Easy to upgrade equipment when leases expire.

Lease cons.

• Total cost over the lease term often EXCEEDS the cost of buying.
• Not building an owned asset.

When to lease.

• Cash-constrained firms.
• Rapidly-changing technology (computers, vehicles).
• Equipment used briefly or seasonally.

Cambridge tip. Mark scheme accepts multiple advantages — naming all four typically scores 4/4.