Pearson Edexcel · GCSE · Business
Course version: 1BS0 · Version from Sept 2017
Business: ● short-term sources: overdraft and trade credit ● long-term…
Full specification wording
Sources of business finance: business: ● short-term sources: overdraft and trade credit ● long-term sources: personal savings, venture capital, share capital, loans, retained profit and crowd funding.
Businesses need finance for different durations.
Checked against the Pearson Edexcel 1BS0 specification (opens in a new tab) on .
- Point 2 of 2
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Businesses need finance for different durations. Short-term sources fund daily operations. An overdraft lets a business withdraw more than its bank balance, aiding cash flow, while trade credit delays supplier payments. Long-term sources fund major investments over a period greater than a year. Personal savings and retained profit are internal options. External long-term sources include bank loans (repaid with interest), share capital (selling company ownership), venture capital (expert investors seeking high returns), and crowd funding (raising small amounts from many people online).
For example: A café might use trade credit for coffee beans but a bank loan to buy a new espresso machine.
What earns the marks
- Explain the cost implications of different sources, such as interest rates on loans and overdrafts versus giving up equity for share capital.
- Evaluate the suitability of a finance source based on the business type, for example, share capital is only available to incorporated businesses.
- Analyse the risk associated with external finance, such as the potential loss of control with venture capital or the obligation to meet loan repayments.
Common mistakes and how to put them right
Confusing short-term and long-term finance.
Put it right: Overdrafts and trade credit are short-term, while loans, share capital, personal savings, venture capital, retained profit, and crowd funding are long-term.
Stating that sole traders can use share capital.
Put it right: Specify that only private and public limited companies can issue shares to raise finance.
Assuming retained profit is always available to new businesses.
Put it right: Recognise that start-ups usually lack retained profit and must rely on personal savings or external sources.
Exam tips
- Always link the chosen source of finance to the specific context of the business in the case study, considering its size and legal structure.
- When evaluating a finance option, contrast the benefits of not paying interest (like retained profit) with the opportunity cost or limited availability.
- Use the term 'cash flow' when discussing the benefits of short-term sources like overdrafts and trade credit.
Try the lesson
The start of the Sources of business finance: business: ● short-term sources: overdraft and trade credit ● long-term sources: personal savings, venture capital, share capital, loans, retained profit and crowd funding. lesson, made from checked teaching notes for this specification point.
Have a go first
A retail business needs to purchase inventory for the upcoming holiday season and plans to pay for it within 30 days. Which source of finance is most appropriate for this short-term need?
Listen
Businesses need finance for different durations. Short-term sources fund daily operations. An overdraft lets a business withdraw more than its bank balance, aiding cash flow, while trade credit delays supplier payments. Long-term sources fund major investments over a period greater than a year. Personal savings and retained profit are internal options. External long-term sources include bank loans (repaid with interest), share capital (selling company ownership), venture capital (expert investors seeking high returns), and crowd funding (raising small amounts from many people online). For example, a café might use trade credit for coffee beans but a bank loan to buy a new espresso machine. A strong answer earns marks for these points. Identify whether a source of finance is short-term (used for day-to-day operations) or long-term (intended for use over more than a year, whether repayable like loans or non-repayable like share capital and retained profit). Explain the cost implications of different sources, such as interest rates on loans and overdrafts versus giving up equity for share capital. Evaluate the suitability of a finance source based on the business type, for example, share capital is only available to incorporated businesses. Analyse the risk associated with external finance, such as the potential loss of control with venture capital or the obligation to meet loan repayments. A common slip: Confusing short-term and long-term finance. Instead, overdrafts and trade credit are short-term, while loans, share capital, personal savings, venture capital, retained profit, and crowd funding are long-term. Exam tip: Always link the chosen source of finance to the specific context of the business in the case study, considering its size and legal structure.
See it
Key words
Say what each word means before you turn the card.
Overdraft
Try answering aloud or in your head before turning the card.
Trade credit
Try answering aloud or in your head before turning the card.
Retained profit
Try answering aloud or in your head before turning the card.
Venture capital
Try answering aloud or in your head before turning the card.
See every definition
- Overdraft
- A short-term source that lets a business withdraw more than its bank balance, aiding cash flow.
- Trade credit
- A short-term source that delays supplier payments.
- Retained profit
- An internal long-term source of finance.
- Venture capital
- An external long-term source involving expert investors seeking high returns.
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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