Subject: Business | Level: GCSE | Exam Board: AQA
Every business needs money to start, grow, and survive. This study guide covers the essential internal and external sources of finance, teaching you how to evaluate the best option for different business scenarios to secure top marks.
Revision Notes & Key Concepts
Key Terms & Definitions
- Internal Finance
- Money raised from within the business itself.
- External Finance
- Money raised from individuals or organisations outside the business.
- Retained Profit
- Profit kept in the business after taxes and dividends, used for reinvestment.
- Collateral / Security
- An asset (like a building) that a bank can claim if a loan is not repaid.
- Dividends
- The share of the profit paid to shareholders.
- Cash Flow
- The movement of money in and out of a business.
Worked Examples
Worked Example
Question: Explain one advantage and one disadvantage of a business using an overdraft. (4 marks)
Solution: **Advantage**: One advantage of an overdraft is its flexibility (1). The business only pays interest on the exact amount they are overdrawn by, making it a cost-effective way to manage short-term cash flow shortages, such as waiting for customers to pay invoices (1). **Disadvantage**: One disadvantage is the high cost (1). Overdrafts typically have much higher interest rates than standard bank loans, and the bank can legally demand full repayment at any time, which could force the business into bankruptcy (1).
Worked Example
Question: Evaluate whether a successful, established sole trader should use a bank loan or take on a partner to fund a major expansion. (9 marks)
Solution: A bank loan would provide the sole trader with the necessary capital for expansion while allowing them to maintain 100% control over the business. They would not have to consult anyone else on major decisions or share the future profits. However, the loan must be repaid with interest, which increases fixed costs and the break-even point, raising the financial risk if the expansion fails. Alternatively, taking on a partner would bring in fresh capital without the burden of interest payments or the need to repay the money. Furthermore, a partner might bring valuable new skills or experience to the business. However, the original owner would lose absolute control, having to compromise on decisions, and would have to share all future profits with the new partner. In conclusion, if the sole trader is highly protective of their independence and confident in the expansion's profitability, a bank loan is the better option as it preserves their control and right to all profits. However, if they want to avoid increasing their financial risk through debt and could benefit from shared workload, taking on a partner would be more suitable.
Worked Example
Question: State two sources of finance that would be suitable for a new start-up business. (2 marks)
Solution: 1. Owner's savings 2. Government grant
Practice Questions
Question: Identify two external sources of finance. (2 marks)
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Question: Explain one reason why a new start-up might struggle to get a bank loan. (3 marks)
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Question: A private limited company (Ltd) wants to buy a new factory for £500,000. Evaluate whether they should use a mortgage or issue shares to fund this. (9 marks)
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Question: Explain how trade credit helps a business manage its cash flow. (3 marks)
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Question: State one advantage of using retained profit rather than a bank loan. (1 mark)
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