AQA · GCSE · Business
Course version: 8132 · Version from Sept 2017
Sources of finance: Methods businesses use to raise finance
Full specification wording
Sources of finance: Methods businesses use to raise finance
Businesses need finance for start-up, expansion, working capital and emergencies.
Checked against the AQA 8132 specification (opens in a new tab) on .
- Point 1 of 5
- 3 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Businesses need finance for start-up, expansion, working capital and emergencies. Methods include retained profit, net current assets, sale of assets, overdraft, trade credit, loan capital, share capital, venture capital, and crowd funding. Internal finance (retained profit, sale of assets, net current assets) avoids debt but is limited. External finance (overdraft, trade credit, loan capital, share capital, venture capital, crowd funding) provides outside funds but may add cost or loss of control. Short-term methods (overdraft, trade credit) suit cash-flow gaps; long-term methods suit assets. A bakery might use an overdraft for ingredients and loan capital for a new oven. Choosing depends on amount, time, cost and risk.
What earns the marks
- Classifies methods as internal or external and gives a valid example of each.
- Explains how a named method provides finance, such as loan capital paying a lump sum repaid with interest.
- Links a method to a suitable business need, such as an overdraft for a short-term cash-flow gap.
- Compares at least two methods using criteria such as cost, time, control or risk.
- Uses correct business terminology, for example retained profit, net current assets, trade credit, loan capital, share capital, venture capital and crowd funding.
Common mistakes and how to put them right
Treating an overdraft as long-term finance.
Put it right: Explain it is repayable on demand and suited to short-term gaps.
Confusing loan capital with share capital.
Put it right: State loan capital involves borrowing with interest, while share capital involves selling a stake in the business.
Assuming all external finance is a loan.
Put it right: Name other external methods such as share capital, venture capital, crowd funding and trade credit.
Exam tips
- Name the method precisely, then state one advantage and one drawback in the context given.
- Use the business situation in the question to justify why the method fits the need.
Try the lesson
The start of the Sources of finance: Methods businesses use to raise finance lesson, made from checked teaching notes for this specification point.
Have a go first
Which method of raising finance involves a business selling shares to new investors?
Listen
Businesses need finance for start-up, expansion, working capital and emergencies. Methods include retained profit, net current assets, sale of assets, overdraft, trade credit, loan capital, share capital, venture capital, and crowd funding. Internal finance (retained profit, sale of assets, net current assets) avoids debt but is limited. External finance (overdraft, trade credit, loan capital, share capital, venture capital, crowd funding) provides outside funds but may add cost or loss of control. Short-term methods (overdraft, trade credit) suit cash-flow gaps; long-term methods suit assets. A bakery might use an overdraft for ingredients and loan capital for a new oven. Choosing depends on amount, time, cost and risk. A strong answer earns marks for these points. Classifies methods as internal or external and gives a valid example of each. Explains how a named method provides finance, such as loan capital paying a lump sum repaid with interest. Links a method to a suitable business need, such as an overdraft for a short-term cash-flow gap. Compares at least two methods using criteria such as cost, time, control or risk. A common slip: Treating an overdraft as long-term finance. Instead, explain it is repayable on demand and suited to short-term gaps. Exam tip: Name the method precisely, then state one advantage and one drawback in the context given.
See it
Key words
Say what each word means before you turn the card.
Internal finance
Try answering aloud or in your head before turning the card.
External finance
Try answering aloud or in your head before turning the card.
Short-term finance
Try answering aloud or in your head before turning the card.
See every definition
- Internal finance
- Finance from retained profit, sale of assets or net current assets, which avoids debt but is limited.
- External finance
- Outside funds from an overdraft, trade credit, loan capital, share capital, venture capital or crowd funding, which may add cost or loss of control.
- Short-term finance
- Methods such as an overdraft or trade credit that suit cash-flow gaps.
Label the diagram
Some boxes have lost their names. Pick the right name for each number.
1Box 1
2Box 2
3Box 3
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