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Where does a business get its money, and how does it choose the right source?

Sources of finance: internal and external sources, short-term and long-term finance, the features of each source, and how to choose the most appropriate source for a given purpose.

A focused answer to the Eduqas GCSE Business C510 content on sources of finance, covering internal and external sources, short-term versus long-term finance, the features of each, and how to match the source to the purpose.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

A business can raise finance from inside itself (internal) or from outside (external). Internal sources include retained profit (profit kept and reinvested), selling assets, and the owner's own savings; they cost nothing in interest and keep control, but are limited in size. External sources include bank loans, overdrafts, share capital, trade credit, leasing, hire purchase, government grants and crowdfunding. Finance is also short-term (overdraft, trade credit) for day-to-day needs, or long-term (loan, share capital) for lasting investment. Each source has trade-offs: loans must be repaid with interest; selling shares raises large sums but dilutes ownership; an overdraft is flexible but expensive and can be withdrawn. The golden rule is to match the source to the purpose: use long-term finance (a loan or share capital) for a long-term asset like machinery, and short-term finance (an overdraft or trade credit) for a short-term cash gap. Choosing the right source means weighing cost, control, risk and how long the money is needed.

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What this topic is asking
Internal sources of finance
External sources of finance
Short-term versus long-term finance
Choosing the right source
Try this

What this topic is asking

Eduqas C510 wants you to know the main sources of finance, the difference between internal and external sources and between short-term and long-term finance, the features of each source, and how to choose the most appropriate source for a given purpose. The exam often gives a business needing money for a specific reason and asks which source fits best, so the golden rule, match the source to the purpose, is what to apply.

Internal sources of finance

Internal sources are usually cheaper (no interest) and keep control, but they are limited in size.

External sources of finance

Key fact

Bank loan: a fixed sum borrowed for a fixed period, repaid with interest. Good for large, long-term purchases; commits the firm to repayments.
Overdraft: the right to borrow up to a limit on the current account as needed. Flexible and short-term, but expensive and can be withdrawn by the bank.
Share capital: selling shares to investors (for a company). Raises large sums that need not be repaid, but dilutes ownership and control.
Trade credit: buying from suppliers now and paying later (say in 30 days). Eases short-term cash flow but is limited and short-term.
Leasing and hire purchase: renting or paying in instalments for equipment. Spreads the cost, but costs more overall than buying outright.
Grants and crowdfunding: government grants (often for start-ups or specific aims) or raising small amounts from many people online.

Short-term versus long-term finance

Choosing the right source

The decision rests on the golden rule: match the source to the purpose.

Comparing the cost of two sources of finance

Set out the figures

A business needs $30{,}000$ . Option A is a bank loan at $8\%$ interest a year over $5$ years (interest only, repaying the capital at the end). Option B is selling a $10\%$ stake in the business to an investor who, in an average year, would receive $10\%$ of a $12{,}000$ annual profit as a dividend.

Annual cost of the loan

\text{Loan interest} = 30{,}000 \times 0.08 = 2{,}400 \text{ a year}.

Annual cost of the share sale

\text{Investor's dividend} = 12{,}000 \times 0.10 = 1{,}200 \text{ a year}.

Interpret the result

The loan costs $2{,}400$ a year in interest but the owner keeps full control and the debt ends after five years. The share sale costs less in cash now ( $1{,}200$ a year in dividends) and never has to be repaid, but the owner permanently gives up $10\%$ of the business and its future profits, which could be worth far more than $1{,}200$ a year if the business grows. So the cheaper-looking option (shares) may cost more in the long run through lost ownership. The decision is not only about the annual figure but about control and the long-term value of the business, which is why matching the source to the purpose and weighing control matters as much as the interest rate.

Try this

Q1. State two external sources of finance. [2 marks]

Cue. Bank loan, overdraft, share capital, trade credit, leasing, grants, crowdfunding.

Q2. A business takes a $20{,}000$ loan at $9\%$ interest a year. Calculate the annual interest. [2 marks]

Cue. $20{,}000 \times 0.09 = 1{,}800$ .

Exam-style practice questions

Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Eduqas 20182 marksState two internal sources of finance. (Component 2)

Show worked answer →

A 2-mark AO1 recall question, one mark per valid source. Internal sources come from within the business: retained profit (profit kept from previous years and reinvested), selling assets the business no longer needs, and the owner's own savings (owner's capital). Markers accept any two of these. A common error is to give an external source such as a bank loan or overdraft, which comes from outside the business and so would not score on a question asking specifically for internal sources.

Eduqas 20216 marksA small but growing business needs

40{,}000

to buy new machinery that will last ten years. Evaluate whether a bank loan or an overdraft is the more suitable source of finance. (Component 2)

Show worked answer →

A 6-mark Evaluate question needing a comparison and a judgement applied to the business. A bank loan is borrowed for a fixed period with regular repayments and interest, suited to a large, long-term purchase like machinery; it spreads the $40{,}000$ cost over years matching the asset's ten-year life, giving certainty, though it commits the firm to repayments and interest. An overdraft lets the business borrow up to a limit on its current account as needed, suited to short-term, day-to-day cash shortfalls, not a large fixed purchase; it is flexible but usually has a higher interest rate, can be withdrawn by the bank, and is too small and short-term for $40{,}000$ of machinery. Judgement: the loan is clearly more suitable because the rule is to match the source to the purpose, long-term finance for a long-term asset, so the firm should use a loan and keep the overdraft for short-term cash needs. Markers reward a comparison of both sources against the purpose and a supported conclusion that applies the match-source-to-purpose principle.

Related dot points

Sources & how we know this

WJEC Eduqas GCSE Business specification (C510) — WJEC Eduqas (2017)