5.1 Business Finance

Why Businesses Need Finance

All businesses, from a corner shop to a multinational corporation, need money to get started and keep running. Think of finance as fuel: without it, the business stops moving.

1. Start-Up Capital: The Initial Investment

When a new business is created, it needs money before it can sell a single product or service. This is called start-up capital.

What does start-up capital pay for?

• Fixed assets: Buildings, machinery, delivery vehicles, IT systems
• Current assets: Stock, raw materials, cash to pay early suppliers

Example: A new café needs £50,000 for the lease, kitchen equipment, furniture, uniforms, and stock before it opens the doors to its first customer.

2. Capital Expenditure: Growing Bigger

Once a business is running, it often wants to expand. That requires more money.

• More equipment: A factory might buy a second production line to double output
• New locations: A retailer opens a second branch
• Research & Development: A tech company invests millions in innovation

Real example: Apple spent $29.9 billion on research and development in 2023, investing heavily in AI and new products. That's capital expenditure driven by ambition to grow.

3. Working Capital: The Day-to-Day Fuel

Even if a business has a factory and products ready to sell, it still needs cash flowing in regularly to pay for:

• Raw materials and stock
• Employee wages
• Rent, electricity, water, insurance
• Transport and delivery costs

Without steady working capital, a business can fail even if it's successful and profitable. This sounds strange, but it's very real: imagine you sell a product to a big company, but they don't pay you for 60 days. You still need to pay your workers this week. Without working capital financing (like an overdraft), you're stuck.