Sources of finance

Every business needs money to start, run and grow. Choosing the right source — at the right time, at the right cost — is one of the most important financial decisions a business makes. AQA expects you to know the main sources, classified as internal vs external and short vs long term.

Why finance is needed

• Start-up costs — equipment, premises, deposit, legal.
• Working capital — pay wages, suppliers and bills before customers pay.
• Expansion — new shops, new products, new markets.
• Investment in assets — machinery, vehicles, software.
• Cash-flow gaps — bridge timing of income and outgoings.
• Buying another business — mergers and takeovers.

Internal sources

Money the business already has or can generate without outside help.

1. Owner's funds / personal savings

The founder's own money invested.

Advantages: cheap (no interest); shows commitment. Disadvantages: limited; personal risk.

2. Retained profit

Profit kept in the business rather than paid out.

Advantages: cheapest source — no interest, no dilution; flexible. Disadvantages: limited by profitability; takes years to accumulate.

3. Sale of assets

Sell unwanted equipment, property, vehicles or non-core divisions.

Advantages: turns idle assets into cash; no debt. Disadvantages: one-off; loses use of asset.

4. Working capital management

Tightening cash management — chase customers faster, negotiate longer payment terms, reduce stock.

External sources

Money from outside the business.

1. Bank loan

Fixed sum, fixed term, fixed or variable interest.

Advantages: large amounts; predictable repayments; founder retains ownership. Disadvantages: interest cost; collateral often required; defaults can sink business.

2. Overdraft

Bank facility to spend more than you have, up to a limit.

Advantages: flexible; pay interest only on amount used. Disadvantages: high interest rate; bank can withdraw at short notice.

Best for short-term cash-flow needs.

3. Trade credit

Suppliers let you pay 30, 60 or 90 days after delivery.

Advantages: free if paid on time; common practice. Disadvantages: lose discounts for early payment; supplier may stop credit if abused.

4. Leasing

Rent equipment instead of buying. Pay monthly.

Advantages: no big upfront payment; latest equipment; maintenance often included. Disadvantages: never own asset; total cost more than buying.

5. Hire purchase

Pay in instalments while using the asset; ownership at the end.

Advantages: spread cost; eventual ownership. Disadvantages: higher total cost; debt on balance sheet.

6. Share capital (limited companies)

Sell shares for ownership stake. Public limited companies (plcs) can sell on stock exchange.

Advantages: large amounts possible; no interest; permanent. Disadvantages: dilutes ownership; loss of control; dividends expected; cost of issue.

7. Crowdfunding

Online platforms (Crowdcube, Seedrs) where many small investors back a business.

Advantages: fast; builds early customer/fan base; alternative to bank. Disadvantages: dilutes ownership; failure is public; legal complexity.

8. Venture capital / business angels

High-net-worth individuals or VC funds invest in high-growth start-ups.

Advantages: large amounts; expertise and contacts; mentoring. Disadvantages: high stake taken (20–40 %+); pressure to grow fast; possible exit forced.

9. Government grants

Some grants for specific sectors or regions (Levelling Up, R&D, green tech).

Advantages: not repaid. Disadvantages: small; competitive; often slow paperwork.

10. Mortgage

Long-term loan secured against property.

Advantages: long term (15–25 years); large amounts. Disadvantages: lose property if default; interest cost.

Short term vs long term

Short term (under 1 year)

• Overdraft.
• Trade credit.
• Short-term loans.
• Working capital improvements.

Used for: cash-flow gaps, seasonal stock, quick repairs.

Long term (over 1 year)

• Bank loans.
• Mortgages.
• Share capital.
• Venture capital.
• Leasing / hire purchase.

Used for: equipment, property, expansion.

Rule: match source to use. Short-term overdraft for stock; long-term mortgage for property.

Choosing the right source

Factors:

• Amount — small amounts → owner / overdraft; large → bank loan or shares.
• Cost — interest, fees, dilution.
• Risk appetite — debt risks default; equity risks dilution.
• Stage — start-ups can't usually access bank loans; established firms can.
• Type of business — sole trader vs ltd vs plc.
• Existing finance — high debt limits new borrowing.
• Time — bank loan may take weeks; overdraft is instant.

Real-world examples

• BrewDog — used crowdfunding from 2010; raised £100 m+ from "Equity for Punks" investors.
• Deliveroo — venture capital from Index Ventures, then IPO 2021.
• Greggs — uses retained profit + bank financing for expansion (now a plc).
• Cadbury family — generations of retained profit funded growth before becoming a plc.

Examiner tips

For 6+ mark questions, recommend a specific source with reasoning. Match cost, amount, risk and stage. Discuss alternatives. Always conclude with the trade-off (cost vs control).