Evaluate the suitability of sources of finance for new and established…

The idea

Every business needs finance, but suitability depends on purpose, amount, time period, cost and the firm's age and risk profile. A new business (start-up) has no trading record, so lenders see high risk: owner's capital, family loans, retained profit (usually absent), bank overdraft, small business loan, grants, crowdfunding and, for larger ventures, business angels or venture capital may be considered. An established business has accounts, assets and cash flow evidence, so it can access retained profit, trade credit, bank loans, overdrafts, leasing, hire purchase, share issue (for a company) or debenture. Evaluate by weighing cost (interest, fees, dilution of control), availability, flexibility, repayment timing and risk against the specific need, such as buying a delivery van versus funding seasonal stock.

What earns the marks

• Links each source to a suitable purpose and time frame: short-term overdraft or trade credit for working capital, medium-term leasing or hire purchase for equipment, long-term loan or share issue for expansion.
• Analyses cost and control implications: interest and arrangement fees raise total repayment, while issuing shares dilutes ownership and voting control; retained profit avoids both but is limited.
• Evaluates by reaching a supported judgement that compares at least two sources for a stated business context, weighing risk, cost, flexibility and availability before recommending one.
• Uses business terminology accurately, for example distinguishing internal from external finance and short-term from long-term finance.

Common mistakes and how to put them right

• Listing sources without linking them to the business's age or purpose.

  Put it right: State why the source fits this business and this need.

• Treating all borrowing as equally risky or equally cheap.

  Put it right: Compare interest, fees, security required and repayment schedule for each option.

• Assuming a new business can issue shares or debentures.

  Put it right: Only limited companies can issue shares, and debentures are typically used by larger established firms.

• Ignoring the effect on ownership and control.

  Put it right: Explain that external equity finance can dilute the owner's share and decision-making power.

Exam tips

• Read the case study carefully and name the specific finance need, amount and time period before choosing sources.
• Use connectives such as because, therefore and however to build chains of reasoning rather than isolated points.
• For evaluation questions, compare at least two realistic options and finish with a justified recommendation that answers the question directly.
• Apply the context: refer to the named business, its size, age and sector instead of writing generically.