Sources of Finance

    OCR
    GCSE

    Examination of the strategic selection and management of financial resources available to businesses. Candidates must evaluate the suitability of internal versus external capital, the implications of debt versus equity on gearing and control, and the alignment of finance duration with asset lifecycle (the matching principle). Assessment focuses on the trade-offs between cost, risk, and loss of ownership across different legal structures and business stages.

    5
    Objectives
    4
    Exam Tips
    4
    Pitfalls
    3
    Key Terms
    4
    Mark Points

    Learning Objectives

    What you need to know and understand

    • Overdrafts are repayable on demand and carry high daily interest rates.
    • Retained Profit involves no interest but carries an opportunity cost for owners.
    • Trade Credit improves working capital but risks supplier relationships if payment is late.
    • Venture Capital provides expertise/mentoring but requires sacrificing equity/control.
    • Crowdfunding validates the product concept but exposes ideas to competitors.

    Example Examiner Feedback

    Real feedback patterns examiners use when marking

    • "You identified a valid source, but you must explain why it fits this specific business's legal structure."
    • "Develop your analysis: explain the consequence of high interest rates on the business's break-even point."
    • "Your recommendation is valid, but you need to explain why the alternative option was rejected to gain evaluation marks."
    • "Link the finance source duration to the asset's lifespan to demonstrate understanding of financial efficiency."

    Marking Points

    Key points examiners look for in your answers

    • Award marks for accurate classification of sources (e.g., Overdraft as short-term external).
    • Credit responses that explicitly link the choice of finance to the business ownership structure (e.g., Sole Traders cannot issue shares).
    • Candidates must analyse the implications of the source, such as loss of control (equity) versus increased gearing (debt).
    • High-level responses must weigh the cost of borrowing against the potential return on investment (ROI).

    Examiner Tips

    Expert advice for maximising your marks

    • 💡Always check the legal structure (Ltd, PLC, Sole Trader) before recommending Share Capital.
    • 💡Apply the 'Matching Principle': Short-term needs require short-term sources; long-term assets require long-term finance.
    • 💡Use the 'BLT' structure (Because, Leading to, Therefore) to develop chains of analysis.
    • 💡When evaluating, justify why the chosen source is better than the alternative, not just why it is good.

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Suggesting 'selling shares' for a Sole Trader or Partnership.
    • Confusing 'revenue' or 'profit' with 'cash flow' when discussing overdrafts.
    • Stating 'Bank Loan' is suitable for short-term cash flow problems (mismatch of duration).
    • Failing to consider the applicant's credit history or collateral when suggesting loans.

    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

    Identify
    Explain
    Analyse
    Evaluate
    Recommend
    Calculate

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