Component 1: Business finance — Eduqas A-Level Business
Test yourself on Component 1: Business finance with EDUQAS A-Level practice questions.
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Component 1: Business finance explained
Classify before listing. Internal funding comes from owner savings, retained profit and the sale of surplus assets; external funding comes from bank loans, overdrafts, trade credit, leasing and hire purchase, business angels, venture capital, crowdfunding, peer to peer lending, debt factoring and grants. Cut the same list by term, since an overdraft or trade credit bridges a working capital gap while a mortgage or a lease funds an asset across its useful life, and by type, since debt is repaid with interest whereas equity is sold ownership. Small firms face a narrower menu than listed companies: a sole trader or private limited company cannot offer shares to the public, and a lender usually wants security or a personal guarantee. A Start Up Loan from the British Business Bank, a personal loan of up to 25,000 pounds at a fixed rate, is a realistic route for a new trader.
Analyse the advantages and disadvantages of each source of finance
Judge every option against the same short list of criteria: cost, control, risk, speed, availability and whether security is demanded. Cost can be quantified, since interest at eight percent on a 50,000 pound loan is 4,000 pounds a year charged before profit for the year, while equity looks free until the founder counts the dividends and the board seat given away. Risk is captured by gearing, which is non-current liabilities divided by capital employed and multiplied by one hundred, expressed as a percentage, with figures above fifty percent usually read as highly geared and vulnerable in a downturn. The matching principle disciplines the choice: fund long-life assets with long-term money, because repaying a machine out of an overdraft drains the working capital the firm needs to trade.
Evaluate different sources of finance available to entrepreneurs and SMEs
A judgement here has to name a winner and defend it against the firm's own circumstances, which means the amount needed, the purpose, the repayment term, the trading record, the security available and the owner's attitude to sharing control. A profitable firm with assets and a bank relationship can choose the cheapest option; a pre-revenue start-up with nothing to pledge may be limited to a personal guarantee, crowdfunding or an angel who wants a stake. Support the choice with evidence from the cash flow forecast and from gearing, then state what would overturn it, such as a rise in interest rates or a major customer paying late. Remember that real firms blend sources, funding stock on trade credit, equipment on a lease and expansion from retained profit, so the strongest answers recommend a package rather than a single label.
Your focus
- Explain the sources of finance available to entrepreneurs and SMEs
- Analyse the advantages and disadvantages of each source of finance
- Evaluate different sources of finance available to entrepreneurs and SMEs
Component 1: Business finance exam tips
Marking Points
- Classification carries the explanation: internal against external, short term against long term, and debt against equity, with a source placed correctly in each pairing.
- Each source tied to what it funds, so trade credit and an overdraft are offered for a timing gap in working capital while leasing or a term loan is offered for equipment or premises.
- Recognition of the small firm constraint, for example that equity for an unlisted company means selling a stake to an angel or a venture capital fund, which costs ownership and control.
- Accurate concrete detail, such as the repayment cap on a Start Up Loan, the security a bank expects, or the fact that a grant does not have to be repaid but comes with conditions.
- The same criteria applied to each option, namely cost of finance, loss of control, financial risk, speed of access, availability and the security required.
- Quantified cost where the case allows it, for example annual interest in pounds, the deposit on hire purchase, or the percentage a factoring company deducts from each invoice.
- Use of gearing, calculated as non-current liabilities divided by capital employed multiplied by one hundred, to show that extra debt raises fixed repayment commitments and the risk of insolvency if sales fall.
- Application of the matching principle, pairing the life of the asset with the term of the finance and saying what goes wrong when the two are mismatched.
- A clear recommendation naming one source or a named combination, with the criterion it wins on spelled out for this firm.
- Judgement weighed against the firm's position, for example that a start-up with no trading history and no collateral will not be offered an unsecured bank loan whatever the headline rate.
- Evidence from the case used in the decision, such as the cash flow forecast, the size of the funding gap, existing gearing or the owner's stated wish to keep full control.
- A stated condition, risk or timescale that would change the decision, which is where the highest evaluation marks sit.
Examiner Tips
- 💡Explain tasks on this content are usually worth four to six marks and reward two or three sources with a developed reason each, not a list of ten names.
- 💡Anchor every source to the case: how much is needed, how quickly it is needed, and whether the owner has assets to pledge as security.
- 💡Use the precise term the board uses, since overdraft, loan and trade credit are separate things and blurring them loses easy marks.
- 💡Analysis marks come from chains, so run each one from the source to its immediate effect on cost or control and then on to cash flow, profit or ownership.
- 💡Where a balance sheet or a gearing figure appears in the case, use it, because a firm already geared above fifty percent makes further borrowing a far weaker proposition.
- 💡Balance is expected: if the question says advantages and disadvantages, an answer covering only one side is capped whatever its quality.
- 💡This is a high-tariff evaluate or recommend task, so plan two supported options and the decision before writing a word.
- 💡Reduce each option to an annual cost in pounds where you can, because a quantified comparison is the quickest route into the top band.
- 💡Keep a line for the counter-argument, then say why it does not change your recommendation for this firm.
Common Mistakes
- Treating retained profit as a pile of cash, when it is an accumulated accounting balance that may already sit in inventory, equipment or receivables.
- Describing a share issue on the stock market for a small private company, which is not legally able to offer shares to the public.
- Naming sources with no statement of purpose, so an overdraft ends up funding a factory extension and a long loan ends up funding one month of wages.
- Calling venture capital free because no interest is charged, when the entrepreneur surrenders equity, a share of future profit and often control of strategy.
- Praising an overdraft as cheap because it is flexible, ignoring that the rate is high and the facility is repayable on demand.
- Setting out two columns of advantages and disadvantages with no reference to this firm's trading record, assets or cash position, which holds the answer below the analysis band.
- Recommending the cheapest source without asking whether it is available, since a low rate is irrelevant if no lender will deal with the firm.
- Confusing profitability with liquidity, and so recommending long-term finance for a profitable firm that is simply short of cash this month.
- Leaving the verdict unqualified, with no risk, condition or timeframe attached, which reads as an assertion rather than a judgement.