Sources of Finance

AQA

A-Level

The study of Sources of Finance necessitates a critical evaluation of the mechanisms through which businesses acquire capital for start-up, operation, and expansion. Candidates must distinguish between internal and external sources, analyzing the implications of debt versus equity on gearing ratios, control, and financial risk. Mastery requires the application of these concepts to specific business structures (Sole Traders, Partnerships, LTDs, PLCs) and lifecycle stages, assessing the suitability of instruments ranging from retained profits and trade credit to venture capital and share issues.

Objectives

Exam Tips

Pitfalls

Key Terms

Mark Points

What You Need to Demonstrate

Key skills and knowledge for this topic

Award marks for accurate distinction between debt (e.g., bank loans, debentures) and equity (e.g., share capital, venture capital) financing.
Credit application that links the choice of finance to the specific legal structure (e.g., PLCs accessing stock markets vs. Ltds restricted to private investors).
Reward developed chains of reasoning that analyze the impact of financing on financial ratios, specifically Gearing and Return on Capital Employed (ROCE).
Assess evaluation based on the trade-off between cost of capital (interest/dividends) and loss of control or financial risk.

Example Examiner Feedback

Real feedback patterns examiners use when marking

"You have identified a valid source, but you must apply it to the specific constraints of this business (e.g., its PLC status)."
"Your analysis of the bank loan is generic; integrate the Gearing ratio calculation to prove they can afford the interest."
"Develop your chain of reasoning further: how does issuing shares specifically impact the current shareholders' control?"
"The recommendation needs more weight; explain why this source is better than the alternative rejected options."

Marking Points

Key points examiners look for in your answers

Award marks for accurate distinction between debt (e.g., bank loans, debentures) and equity (e.g., share capital, venture capital) financing.
Credit application that links the choice of finance to the specific legal structure (e.g., PLCs accessing stock markets vs. Ltds restricted to private investors).
Reward developed chains of reasoning that analyze the impact of financing on financial ratios, specifically Gearing and Return on Capital Employed (ROCE).
Assess evaluation based on the trade-off between cost of capital (interest/dividends) and loss of control or financial risk.

Examiner Tips

Expert advice for maximising your marks

💡Always calculate the Gearing ratio (Non-current liabilities / Capital Employed x 100) before recommending debt financing.
💡When discussing Venture Capital, explicitly mention the loss of ownership/control and the expertise provided, not just the money.
💡Context is king: A start-up has different options (crowdfunding, angel investors) compared to a mature PLC (debentures, rights issues).
💡In 16 and 25-mark essays, ensure the final judgment justifies *why* one source is superior to another under the specific current economic climate (e.g., interest rates).

Common Mistakes

Pitfalls to avoid in your exam answers

Confusing 'profit' with 'cash' when discussing retained profits as a source of finance.
Suggesting a 'share issue' for a sole trader or partnership, or failing to distinguish between a rights issue and a public offer.
Stating that bank loans are 'easy to get' without considering the business's credit history, collateral, or current gearing ratio.
Conflating short-term sources (overdrafts, debt factoring) with long-term capital expenditure requirements.

Key Terminology

Essential terms to know

Likely Command Words

How questions on this topic are typically asked

Calculate

Explain

Analyse

Evaluate

Recommend

To what extent

Ready to test yourself?

Practice questions tailored to this topic