Why business needs finance?

All businesses need finance sooner or later. Usually businesses need finance for three main reasons.

Startup Capital

Business might need finance to at the start in the form of Capital. This is known as startup capital. Startup capital is used up for initial investment such as land, building, machinery, employee people etc.

Expansion

A business might need additional source of finance when it needs to expand. This expansion may include

• extension of present facilities such as purchasing additional machinery and extending capacities.
• a business might also need to go in for inorganic expansion such as purchase of another business through a takeover. Usually a business will have to arrange huge amount of additional finances for these purposes.
• entering new markets. It involves huge investments in research and development and aggressive marketing campaigns.

Research and Development

Businesses need finance to develop new products. Multinational businesses usually spend millions of dollars every year in Research and Development purposes. R & D is carried out regularly in big businesses as a mean to get a competitive edge over its competitors.

Running of the business

Apart from investment at the initial stages a business needs a constant flow of capital in the form of working capital. A shortage of working capital might lead to serious consequences for the business or cash flow problems.

During trouble times

A business might need additional dose of capital or financial help during troubled times such as a recession, or when the sales of the business are fall temporarily due to market conditions.