Page 257 - Cambridge IGCSE Business Studies

19: Business finance: needs and sources

CASE STUDY Marie-Claire Ayurwanda’s story

After her second husband died, Marie-Claire decided to start a business. She took a $40 loan from Village Phone

microfinance partner URWEGO to open the Isimbi Restaurant. Th e profits from the restaurant help support the four

children in her household and pay school fees. If a customer wants to make a phone call, she proudly takes them to a
separate, private room where she has set up her Village Phone.
Her Village Phone business was so profitable that she was able to pay off the loan for it in five months. She is now

interested in adding a second phone that she can run in another small village. She also wants to buy a pickup truck to
help others in IMPUHWE thrive economically. ‘People in the association have their own gardens with Irish potatoes.
With a pickup, I can take the potatoes to Kigali and sell them.’
Source: Adapted from http://worldrelief.org/Page.aspx?pid=1674. Visit this website for more information about
micro-financing and read some of the success stories from around the world

TASK
a Why might Marie-Claire be described as an entrepreneur?
b Why might Marie-Claire have found it difficult to raise the finance she needed for her business from banks and other

lenders?
c Do you think Marie-Claire has a successful business? Justify your answer.

Factors influencing the choice of finance

■ Size and legal form of business – unincorporated businesses such as sole traders
and partnerships are unable to raise finance by issuing shares. These smaller 255
businesses will also find it more difficult borrow from banks and other lenders

because they are considered at greater risk of not being able to pay back the
amount borrowed. Even when small businesses are able to borrow from banks,
they are often charged a higher rate of interest. The business’s legal status may

therefore influence the sources of finance available to it.
■ Amount required – if a large capital amount is required then share issues and
debentures are more appropriate. A smaller amount might be financed through
bank loans or leasing and hire purchase.
■ Length of time – the business needs to plan carefully to decide how long it will
need the finance for. If it is very long-term finance then it may want to consider
TOP TIP debentures or share issues. In the short-term, an overdraft may be the most flexible

You must be able to describe solution. The longer the period of time finance is borrowed over the more costly it
the main sources of finance, but
will be because of interest payments.
more importantly you must know
which source would be suitable in ■ Existing borrowing – if a business already has existing borrowing then it might find

a given situation. it more difficult to borrow further amounts from banks and other lenders. This is
because it will be seen as a greater risk.

Choosing sources of finance

We have seen above the factors that may influence the choice of fi nance. Choosing
the right source of finance will require consideration of these factors combined

with other factors such as the profitability of the business, why the fi nance is

needed and the extent to which owners want to retain control over their business.