Sources of Business Finance (Edexcel GCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
An Introduction to Sources of Finance
All businesses need finance to get started, allow them to grow and fund their continuing activity
Finance may be needed for capital expenditure which is spending on fixed assets such as equipment, buildings, IT equipment and vehicles
Similarly, finance is required for operating expenditures which is spending on raw materials or day to day expenses such as wages or utilities
Businesses have different sources of finance available to them in the short-term and the long-term
Long-term and short-term sources of finance
Short-term Sources of Finance
An Explanation of the Short-term Sources of Finance Available to Businesses
Source | Explanation | Pros | Cons |
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Overdrafts |
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Trade credit |
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Long-term Sources of Finance
An Explanation of the Long-term Sources of Finance Available to Businesses
Source | Explanation | Pros | Cons |
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Share capital |
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Bank loans |
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Crowdfunding |
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Retained profit |
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Venture capital |
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If businesses choose to borrow money in the form of a loan or overdraft, it will need to consider the full cost of repaying the borrowing
Interest must be paid on loans which means that the amount that is required to be repaid is higher than the original amount borrowed
Worked Example
When starting her business in 2019, Paulina took out a loan. The financial details of this loan are in the table below.
Loan required from the bank | £20,000 |
Total repayments for the loan | £22,200 |
Length of loan | 3 years |
Using the information in the table, calculate the interest on the loan as a percentage of the total amount borrowed. You are advised to show your workings.
(2 marks)
Step 1: Deduct the original loan amount from the total repayments to calculate the total interest paid
£22,200 - £20,000 = £2,200
(1 mark)
Step 2: Divide the total interest paid by the original loan amount
£2,200 ÷ £20,000 = 0.11
Step 3: Multiply the outcome by 100 to calculate the percentage rate of interest
0.11 x 100 = 11%
(1 mark)
Examiner Tip
Recently, some sources of finance, like bank loans have been trickier to access. When considering the best source of finance in your answers, acknowledge that businesses may find accessing these sources more challenging and expensive than in previous years. Crowd funding has been able to fill some of the gaps left by changes in the banking industry.
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