Establishing the Need for Finance

Abstract

Imagine that you have to move to another part of the country to take up a new job. For many reasons, and certainly financially, this could be traumatic. You may not receive your first salary for a month, and until then you and your family have to be fed. With luck you will have some savings for such an emergency, or your might obtain a loan from friends, family or your new employer, to tide you over the lean period. However, your problems are only just beginning; whilst you have solved your short‐term problem of financing daily living expenses, much larger sums of money will be needed to finance purchase of a house, furniture and perhaps a car. The car could perhaps be bought on hire purchase, or by arranging a personal two‐ or three‐year loan through your bank; and a long‐term housing loan could be arranged with a building society or a bank on the mortgage of your new home. Your need for financial assistance arises mainly because you lack immediate access to sufficient money of your own. True, your new job will provide salary cash flows, out of which you can repay the instalments on your loans – but in the future, not immediately. It is this non‐synchronisation of cash receipts and payments, especially where cash outflows are large if infrequent, that creates the demand for finance‐ for both private and business purposes.