Where do businesses get the money they need?
The main sources of finance for a business, the difference between short-term and long-term and internal and external sources, and the advantages and disadvantages of each, including the suitability for different situations.
A focused answer to AQA GCSE Business 3.6.1, covering the main sources of finance, short-term versus long-term and internal versus external sources, and the pros, cons and suitability of each.
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What this dot point is asking
AQA wants you to identify the main sources of finance, distinguish short-term from long-term and internal from external sources, and give the advantages, disadvantages and suitability of each.
Internal and external sources
Internal sources
External sources
Short-term and long-term finance
Short-term sources such as overdrafts and trade credit cover everyday running costs and bridge short cash gaps. Long-term sources such as loans and share capital fund big, lasting investments like buildings, machinery or expansion. A guiding principle, which AQA likes to see applied, is to match the source to the use: do not fund a 10-year asset with a 30-day overdraft, and do not pay overdraft-level interest for a purchase you will own for years.
Choosing the right source
The best source depends on three things: the purpose (short-term gap or long-term asset), the type of business (only a company can sell shares; a sole trader is limited to loans, savings, overdrafts and trade credit), and the cost and risk the owner is willing to take on. There is a trade-off between cost (interest), control (sharing ownership) and risk (security, repayment pressure). Cheap finance often means giving something up: retained profit is interest-free but only available if the business is profitable; share capital is interest-free but dilutes control; a loan keeps control but adds repayment risk.
Try this
Q1. State two internal sources of finance. [2 marks]
- Cue. For example, retained profit and selling assets (also owners' savings).
Q2. Explain one advantage and one disadvantage of a bank loan. [4 marks]
- Cue. Advantage: provides a large sum repaid over time. Disadvantage: interest must be paid and security may be needed.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20193 marksExplain one disadvantage to a private limited company of raising finance by issuing new shares. (Paper 2, Section B)Show worked answer →
A 3-mark explain question rewards one point developed through a chain (point, then why it matters).
Issuing new shares brings in money without interest, but the disadvantage is that ownership and control are diluted: the new shareholders own part of the company and can vote at meetings. This means the original owners may lose some control over decisions, and future profits must be shared among more shareholders as dividends.
Markers reward a single clearly identified disadvantage extended by at least one consequence. A bare list ("loss of control") with no development caps at one mark.
AQA 20219 marksA sole trader who runs a successful gardening business wants to buy a van to take on larger contracts. The trader has limited savings. Justify whether a bank loan or a leasing arrangement would be the better source of finance. (Paper 2, Section C)Show worked answer →
A 9-mark justify question: recommend, apply to the gardening business, and weigh the alternative.
A loan gives the trader outright ownership of the van once repaid, which suits an asset they will use for years, but it requires repayments with interest and possibly security, and the trader has limited savings to fall back on. Leasing avoids the large upfront cost and spreads payment, protecting cash flow for a small business, but it is more expensive over time and the trader never owns the van.
A supported judgement might choose leasing because the trader's weak cash position makes protecting day-to-day liquidity the priority, and the van can be upgraded at the end of the lease. The recommendation must be justified against the rejected option, applied to a cash-tight sole trader. Markers reward the decision plus reasoning, not two lists.
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Sources & how we know this
- AQA GCSE Business (8132) specification — AQA (2017)