Why Does a Business Need to Make a Profit?

by Ciaran John; Updated September 26, 2017

A business does not have to make a profit if the business owner does not mind operating the business with funds from other sources and losing money on it over the course of time. However, in order for a business to become self-sustaining and capable of attracting investment, it must generate profits. Otherwise, it will eventually become insolvent.

Start-Up

Many businesses do not generate a profit in the first few years of operating. Start-up businesses do not have an established customer base, and until a business has customers it cannot become profitable. Different businesses have varying levels of start-up costs. Manufacturing businesses cannot start operations until machines and equipment have been bought. The owners must pay these start-up costs out of pocket, or borrow the money from a lenders or investors.

Risk Management

Generally, banks are unwilling to lend money to businesses that have been operating for less than two years, but the Small Business Administration does partner with some banks to provide loans for start-ups. The SBA and the lender examine the owner's business plan and compare it with records from other existing businesses in the same industry to determine whether the business sounds viable. The SBA only backs loans for businesses that are likely to create long-term profits, because businesses that fail usually default on loans.

Investors

Private investors provide financing for business ventures that seem likely to generate profits in the long term. The business owner usually agrees to pay interest to the private investor or give the investor a minority ownership stake in the company. Investors do not give money to business owners whose business plans are likely to fail. Some financial institutions exclusively provide financing for start-up businesses, but these ventures are risky because the majority of small businesses fail in the first two years.

Profits

Businesses rely on profits to buy new inventory, expand operations and finance product development. Without profit, a business would stagnate and risk losing its market share to other competitors. Large businesses need to raise profits to keep share prices high and pay dividends to shareholders. If a large business does not generate a profit, its share price falls, which means it cannot raise as much money with share sales and cannot borrow from banks as easily. Companies with falling share prices often become the targets of hostile takeovers by rival firms.