Business location and finance: the factors influencing location decisions, and the internal and external sources of finance available to a new business, including their costs and suitability.

What this dot point is asking

WJEC Unit 1 combines two practical start-up decisions: where to locate and how to fund the business. You need the factors that influence a location decision, and the internal and external sources of finance with their costs and suitability. Strong answers treat both as trade-offs - a better location usually costs more, and cheaper finance usually means less of it or more personal risk.

The answer

Factors influencing location

The main factors WJEC expects are:

• Proximity to the market (customers). Retailers and services need footfall and to be near their target customers; an isolated site may be cheap but starve the firm of trade.
• Proximity to suppliers and raw materials. Manufacturers that use bulky or perishable inputs locate near suppliers to cut transport costs.
• Cost and availability of premises. Rent and business rates are far higher in prime locations, so the firm weighs extra trade against extra fixed cost.
• Availability and cost of labour. Some areas offer a larger or cheaper pool of suitable workers.
• Transport and infrastructure. Good road, rail and broadband links matter for deliveries and online trade.
• Government incentives. The Welsh Government and UK schemes offer grants, cheaper premises or support in certain areas to attract or keep businesses.
• The internet. Many firms now trade online with minimal physical premises, cutting location costs dramatically.

Sources of finance: internal

For a brand-new start-up there is no retained profit yet, so the owner's savings are usually the first source, often topped up by external finance.

Sources of finance: external

External finance is raised from outside the business:

• Bank loan - a fixed sum repaid with interest over an agreed period; suits larger one-off needs but must be repaid and carries interest.
• Overdraft - a flexible facility to spend beyond the account balance up to a limit; useful for short-term cash gaps but expensive if used heavily.
• Mortgage - a long-term loan secured on property, used to buy premises.
• Grants - sums from government or bodies such as Business Wales that need not be repaid, though often conditional and competitive.
• Share capital - selling shares to investors (only for companies); raises large sums but dilutes ownership and control.
• Business angels and venture capital - wealthy investors who provide capital and expertise in return for a stake.
• Crowdfunding - many small contributions raised online.
• Trade credit - buying supplies now and paying later, easing short-term cash flow.
• Leasing - renting equipment instead of buying it, spreading the cost.

Matching the source to the need

The right source depends on the amount needed, the purpose (long-term asset or short-term cash gap), the cost (interest), and the owner's willingness to give up control. Grants are attractive because they need not be repaid; loans suit larger long-term needs; overdrafts and trade credit cover short-term gaps; selling shares funds large growth but dilutes control.

Examples in context

Example 1. A manufacturer near its inputs. A Welsh food-processing firm locates close to its farm suppliers to cut the cost and time of transporting perishable raw materials, accepting that it is further from its urban customers because the finished goods travel better than the inputs. The example shows how a manufacturer weighs proximity to suppliers against proximity to market, a different balance from a retailer.

Example 2. A start-up funded by a mix of sources. A young entrepreneur launching a clothing brand uses personal savings, a Prince's Trust grant and a crowdfunding campaign to raise start-up capital, deliberately avoiding a large bank loan to keep interest costs and personal risk low while the brand is unproven. Trading mainly online keeps location costs minimal. The example illustrates how a cash-strapped start-up combines internal and external sources and uses an online location to reduce both finance needs and premises costs.

Try this

Q1. State two factors that influence where a business locates. [2 marks]

• Cue. Any two of: proximity to customers/footfall, proximity to suppliers, cost and availability of premises (rent and rates), availability and cost of labour, transport and infrastructure, government incentives, the option of an online location.

Q2. Explain one advantage of using a grant rather than a bank loan to finance a start-up. [3 marks]

• Cue. A grant need not be repaid and carries no interest, so it does not burden the new business with repayments, unlike a bank loan which must be repaid with interest.