Key Idea: Money can come from inside the business or from outside it, for a few weeks or for many years. This topic is every source, what each costs, and how to match the source to the need.
Internal sources
- Personal funds: the owner's own savings, for sole traders.
- Retained profit: profit kept in the business, not paid out.
- Sale of assets: selling something the business no longer needs.
External sources
- Borrowing: loan capital, overdrafts, microfinance.
- Selling a share: share capital, business angels, crowdfunding.
- Paying later: trade credit, leasing.
Matching the source
- Short-term needs (stock, wages) suit an overdraft or trade credit.
- Long-term assets (an oven, a shop) suit a loan, shares or leasing.
- Weigh the cost, the risk and the control the owners give up.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Retained profit | profit kept in the business after tax and dividends | cash in the bank: it may already be spent on assets |
| Share capital | money raised by selling shares in the company | a loan: shares are not repaid and carry no interest |
| Loan capital | money borrowed for a set time and repaid with interest | an overdraft, which is flexible and short-term |
| Overdraft | permission to take the bank account below zero, up to a limit | a loan for a fixed amount |
| Trade credit | buying from a supplier now and paying later, often in 30 days | a bank loan |
| Crowdfunding | raising small amounts from many people, usually online | microfinance, which lends small sums to people without bank access |
| Business angel | a wealthy individual who invests in a small business for a share of it | a bank, which lends and does not own a share |
| Leasing | paying to use an asset without owning it | buying on credit, where the business ends up owning it |
Name the source, say what it is, then show it in the case: what it pays for, and what it costs the business in interest, repayments or control. For a Recommend, weigh two sources against the need, then choose and say what the choice depends on.
Exam-style question
Lena's Bakery Ltd borrowed $400,000 from its bank to build the Mill Lane bakehouse, and it buys its flour from Valley Grain, paying 30 days after each delivery. Describe two external sources of finance used by Lena's Bakery Ltd.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: An overdraft for a new oven, or a ten-year loan for this month's flour, is a mismatch the case will punish. Say how long the need lasts before you choose the source.
Tap each card to check yourself.
Internal or external: selling the three old shop ovens? Internal. Sale of assets: the money comes from inside the business.
Why might Lena not want a business angel? She gives up part of the company: with Farida's 400 new shares, Lena's stake falls from 50% to 37.5%.
Short- or long-term: paying wages in a quiet January? Short-term. An overdraft fits; the gap closes when sales pick up.
One advantage of crowdfunding beyond the money? It tests demand and builds a group of customers who already care about the idea.
Buy or lease: a van needed for only two years? Usually lease: no large payment now, and the van goes back when the need ends.
Who uses microfinance? People and small businesses that banks will not lend to, borrowing small sums.
Exam tips
- Internal sources come from inside the business: personal funds, retained profit, sale of assets.
- Match the length of the finance to the length of the need.
- Shares cost control; loans cost interest; say which the owners would rather give up.
- Describe the sources the case shows before you judge them.
- Calculate interest the way the case gives it, and show every step.