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Why do business need financing

Updated: Jun 18

Cash flow is necessary for a business to operate at all times

Financing is needed as they are used as

  1. Capital for start-ups

  2. Growth/expansion

  3. Survival

Capital for start-ups

Capital is needed to start a business as it needs to pay rent for the premise it operates at. Machines, materials, tools and equipment will also be needed to start operation or service. There may also be recruitment cost as a business may need to hire workers.


In order for a business to grow, it would need to expand its premise, hire new workers, purchase more or replace equipment and tools to develop new products. A business may also need to invest in R&D to develop new technology or conduct market research to identify customer preference.


During a recession, a business may experience a fall in demand, resulting in loss of revenue and profits. To continue to operate, a business will require cash to continue paying employees and rent (fixed cost/expenses) until the economy recovers and demand increases.


  1. Retained profits

  2. Fixed cost

  3. Expenses

  4. Cash flow

  5. Business cycle

  6. Business objectives


  1. Identify two reasons why a business might need finance. (2 marks) May/June 2018/11

  2. Outline two reasons why a business might need finance. (4 marks) May/June 2020/12

  3. Identify two reasons why obtaining finance may not be easy for a new business (2 marks) May/June 2019/11

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