Pearson Edexcel · GCSE · Business
Course version: 1BS0 · Version from Sept 2017
Sources of finance for a start-up or established small
Full specification wording
Sources of business finance: Sources of finance for a start-up or established small
Businesses require capital to launch or grow, and the appropriate source of finance depends on whether they are a start-up or an established small enterprise.
Checked against the Pearson Edexcel 1BS0 specification (opens in a new tab) on .
- Point 1 of 2
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Businesses require capital to launch or grow, and the appropriate source of finance depends on whether they are a start-up or an established small enterprise. Start-ups often lack a financial history, making them reliant on personal savings, loans from friends and family, or government grants. Established small businesses have a track record, allowing them to access bank loans, overdrafts, or retained profit. When evaluating these sources, consider the cost (interest rates), loss of control (if bringing in new owners), and the risk of debt.
For example: An established small business might use retained profit to buy new machinery, avoiding interest payments, whereas a start-up might use a bank loan to secure initial premises.
What earns the marks
- Personal savings are a low-risk, interest-free source of finance commonly used by start-up entrepreneurs.
- Bank loans provide a lump sum for long-term investments but require regular repayments with interest and often demand collateral.
- Overdrafts offer flexible, short-term finance to cover cash flow shortages but usually incur high interest rates.
- Retained profit is an internal source of finance available only to established businesses that have previously generated a surplus.
- Venture capital or business angels can provide significant funds and expertise but require giving up a percentage of business ownership.
Common mistakes and how to put them right
Suggesting retained profit for a new start-up.
Put it right: Start-ups have not yet traded and therefore cannot have retained profit.
Confusing a bank loan with an overdraft.
Put it right: A loan is a fixed amount for long-term use, while an overdraft is a flexible, short-term facility attached to a current account.
Stating that grants must be repaid.
Put it right: Grants are typically provided by the government or charities and do not need to be repaid, provided the conditions are met.
Exam tips
- Always link the chosen source of finance to the specific context of the business, noting whether it is a brand new start-up or an established small business.
- When evaluating a source of finance, contrast a benefit, such as keeping full control with a bank loan, against a drawback, such as the burden of interest payments.
- Consider the time frame of the financial need; recommend overdrafts for short-term cash flow issues and bank loans for purchasing long-term assets.
Try the lesson
The start of the Sources of business finance: Sources of finance for a start-up or established small lesson, made from checked teaching notes for this specification point.
Have a go first
Which source of finance involves an entrepreneur using their own personal money to fund a new start-up business?
Listen
Businesses require capital to launch or grow, and the appropriate source of finance depends on whether they are a start-up or an established small enterprise. Start-ups often lack a financial history, making them reliant on personal savings, loans from friends and family, or government grants. Established small businesses have a track record, allowing them to access bank loans, overdrafts, or retained profit. When evaluating these sources, consider the cost (interest rates), loss of control (if bringing in new owners), and the risk of debt. For example, an established small business might use retained profit to buy new machinery, avoiding interest payments, whereas a start-up might use a bank loan to secure initial premises. A strong answer earns marks for these points. Personal savings are a low-risk, interest-free source of finance commonly used by start-up entrepreneurs. Bank loans provide a lump sum for long-term investments but require regular repayments with interest and often demand collateral. Overdrafts offer flexible, short-term finance to cover cash flow shortages but usually incur high interest rates. Retained profit is an internal source of finance available only to established businesses that have previously generated a surplus. Exam tip: Always link the chosen source of finance to the specific context of the business, noting whether it is a brand new start-up or an established small business.
Key words
Say what each word means before you turn the card.
Personal savings
Try answering aloud or in your head before turning the card.
Bank loans
Try answering aloud or in your head before turning the card.
Overdrafts
Try answering aloud or in your head before turning the card.
Retained profit
Try answering aloud or in your head before turning the card.
See every definition
- Personal savings
- A low-risk, interest-free source of finance commonly used by start-up entrepreneurs.
- Bank loans
- A lump sum for long-term investments that requires regular repayments with interest and often demands collateral.
- Overdrafts
- Flexible, short-term finance to cover cash flow shortages that usually incurs high interest rates.
- Retained profit
- An internal source of finance available only to established businesses that have previously generated a surplus.
There is more to this lesson
The full lesson goes on to check your understanding and help you earn the marks. Create a free account to carry on, with your progress saved.
A week of Premium from your first lesson · Then the free plan continues · No card, no charge
Test your understanding of Sources of business finance: Sources of finance for a start-up or established small
Active recall beats re-reading. Take an instant quiz now to test what you’ve learned and lock it into long-term memory.
A week of Premium from your first lesson · Then the free plan continues · No card, no charge