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Describe two distinct situations requiring short-term finance for a start-up business and explain the most appropriate source of short-term finance in each situation. - Leaving Cert Business - Question C - 2019
Question C
Describe two distinct situations requiring short-term finance for a start-up business and explain the most appropriate source of short-term finance in each situation... show full transcript
Worked Solution & Example Answer:Describe two distinct situations requiring short-term finance for a start-up business and explain the most appropriate source of short-term finance in each situation. - Leaving Cert Business - Question C - 2019
Step 1
Situation Requiring Short-Term Finance: Paying for Stock
Answer
One distinct situation that requires short-term finance for a start-up business is the need to purchase stock. Often, new businesses do not have sufficient cash on hand to pay for inventory upfront. Therefore, they may utilize Trade Credit as a source of short-term finance. This arrangement allows the business to acquire goods from suppliers without immediate payment, negotiating terms that provide some time to sell the stock before the payment is due. This effectively helps in managing cash flow during the initial operational phase.
Step 2
Situation Requiring Short-Term Finance: Paying for Wages/First Month's Rent/Deposit
Answer
Another situation where short-term finance is essential is for covering initial operating costs such as wages for employees and the first month's rent for the business premises. In this case, a Bank Overdraft may be the most appropriate source of short-term finance. This facility allows the business to withdraw more than the available balance in its current account to meet urgent payment obligations. However, it is essential to manage this carefully, as interest is charged on the overdrawn amount, which contributes to increasing financial commitments.