The need for finance: start-up and expansion
A business needs finance to start up (premises, equipment and first stock, before any sales revenue arrives), to run day to day (wages, materials, bills), and to expand (new sites, machinery, new markets). The reason shapes the source: a short-term cash gap suits an overdraft or trade credit; a long-term asset suits a bank loan or share capital. A brand-new firm has no retained profit and few assets, so it relies on personal savings or external sources.
Internal sources of finance
Internal sources come from inside the business, not borrowed. Personal savings are the owner's own money: no interest, no loss of control, but limited and at risk. Retained profit is profit kept in the business, not paid out: no interest or repayment, but only a profitable firm has it. Sale of assets turns idle equipment into cash, one-off and limited. Internal finance is cheaper and lower-risk but limited in size, so a start-up has only savings.
External sources; short vs long term
External sources come from outside the firm. A bank loan is a fixed sum repaid with interest (long-term). An overdraft lets the account go below zero (short-term, high interest). Share capital is selling shares (long-term, no repayment, but owners lose control and share profits). Trade credit is paying a supplier later (short-term, no new cash). Crowd-funding is small online pledges; grants need not be repaid but have conditions. Match the source to the need.
Drawn from real examiner reports.
Defining profit vaguely or circularly
Retained profit depends on profit, so define profit precisely: profit = total revenue minus total costs. Do not answer circularly ("the profit a business makes") or vaguely ("the money you make"). Two further slips: profit is not revenue (all the money coming in), and profit is not cash (a profitable firm can still be short of cash).
June 2024 Paper 2 Q1(c): "Define profit" was answered poorly — circular/vague answers ("money you make") failed; examiners wanted profit = revenue minus total costs.
Justify without a supported judgement
On a "justify which source" question, candidates describe the options with pros and cons but never choose, giving one undeveloped line of evaluation. The top level needs a developed judgement: pick one source and explain why it best fits this business's need — a grant, say, suits a start-up because it need not be repaid, easing early cash flow.
November 2024 Paper 1 Q2(f) and June 2024 Paper 1 Q3(e): understanding of the options was often good, but the top level was missed for want of a developed evaluative judgement.
Trade credit does not raise new cash
Trade credit does NOT raise new cash. It simply lets the business pay a supplier later (e.g. after 30 days), easing short-term cash flow, but no new money comes in. Treating it like a loan or a grant — as finance actually raised — is wrong. If a question asks how much finance a mix of sources brings in, trade credit contributes nothing to that cash total.
Assuming every source must be repaid
Not every source is a loan repaid with interest. A grant does not have to be repaid at all. Share capital is not a loan — shareholders receive dividends out of profit, not a fixed repayment with interest. Only borrowing (a loan or overdraft) is repaid with interest, so labelling grants or shares as repayable finance is wrong.
A start-up cannot use retained profit
A brand-new start-up cannot use retained profit or sale of assets. It has made no profit yet and owns few assets, so those internal sources suit an established business, not a new one. A start-up relies on the owner's personal savings, or on external sources such as a loan, crowd-funding or a grant. Suggesting a start-up "reinvest its retained profit" is a scope error.
Selling shares treated as free money
Issuing share capital is not free money. It brings in cash with no repayment, but the owners give up some control of the business and must share future profits, as dividends, with the new shareholders. An answer that lists only the benefit of raising cash and ignores this loss of control and profit-sharing gives an unbalanced, lower-level evaluation.
What each source does and does not do
The MCQ distractors come from what each source does not do. Trade credit raises no new cash, only letting you pay a supplier later. Grants are not repaid, and share capital is not a loan (shareholders get dividends, not repayment). A start-up cannot use retained profit, having none yet. An overdraft is short-term and repayable on demand, not for buying premises.
November 2024 Paper 1 Q2(f) and June 2024 Paper 1 Q3(e): sources-of-finance questions reward candidates who understand exactly what each source does and does not do.
AO4 is where finance marks are lost
On a finance "justify" or "evaluate" the marks most candidates miss are the AO4 judgement marks. AO1-AO3 come from points about each source applied to the firm; AO4 is the judgement — choose one source and say why it fits this need, not a two-sided list with no decision.
Match the source to the need
Use the judgement hooks for a finance choice: is the need short-term or long-term, can the firm afford repayments and interest, is the owner willing to give up control or risk own money. Finish with a clear, conditional decision, not a list.
Some finance formulae must be recalled
Not every formula is provided. If a question needs a funding gap (amount needed minus internal funds) or a percentage change, show your working — a correct method earns method marks even if the final figure slips. Write the money answer clearly on the line.
A business needs money at different stages:
The reason for the finance decides which source is suitable, so always start by asking: is this need short-term or long-term, and how large is it?
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