Business – 5.1 Business finance – The need for business finance | e-Consult
5.1 Business finance – The need for business finance (1 questions)
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During a recession, cash inflows often fall while fixed costs remain, making liquidity a critical issue. Access to finance allows a business to:
- Maintain operations and meet payroll, preventing loss of skilled staff.
- Invest in strategic adjustments such as price promotions or product diversification to stimulate demand.
Two key financial tools that support survival are:
- Line of credit – a revolving facility that provides immediate cash to cover short‑term shortfalls, with interest paid only on the amount drawn.
- Insurance (e.g., business interruption insurance) – offers compensation for lost revenue when external events disrupt normal trading, reducing the risk of insolvency.
By combining these tools, firms can smooth cash flow, protect against unexpected shocks, and position themselves to recover more quickly when the economy improves.