WalesBusinessSyllabus dot point

Where can a business get the money it needs, and which source should it choose?

Sources of finance: internal and external sources, short-term and long-term finance, owner's capital, retained profit, loans, overdrafts, share capital, crowdfunding and trade credit, and the advantages and disadvantages of each.

A focused answer to the WJEC GCSE Business content on sources of finance, covering internal and external sources, short-term and long-term finance, owner's capital, retained profit, loans, overdrafts, share capital, crowdfunding and trade credit, and their pros and cons.

Generated by Claude Opus 4.813 min answerUpdated 2026-06-15

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

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Quick answer

A business needs finance to start up, to run day to day and to grow, and the money can come from inside or outside the business. Internal sources come from within: the owner's own capital or savings, retained profit (profit kept from previous years), and selling unwanted assets; these avoid interest and outside control but are limited in size. External sources come from outside: a bank loan (a fixed sum repaid with interest over years), an overdraft (the bank lets the account go negative up to a limit, for short-term gaps), share capital (selling shares to investors, who then own part of the company), crowdfunding (many people each give a small amount online), and trade credit (suppliers let the business pay later, usually within 30 to 60 days). Finance is also short-term (for day-to-day needs, such as an overdraft or trade credit) or long-term (for big, lasting items, such as a loan, shares or the owner's capital). Each source has trade-offs: loans must be repaid with interest and raise risk; selling shares gives away ownership and some control; an overdraft is flexible but expensive; retained profit is cheap but uses up reserves. The right choice depends on how much is needed, how long for, the cost, and how much risk and control the owner is willing to accept.

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What this dot point is asking
Internal and external sources
Short-term and long-term finance
Advantages and disadvantages
Why this matters
Try this

What this dot point is asking

WJEC wants you to know where a business can get the money it needs and how to choose. You need the difference between internal and external sources, and between short-term and long-term finance, the main individual sources (owner's capital, retained profit, loans, overdrafts, share capital, crowdfunding, trade credit), and the advantages and disadvantages of each. Choosing the right source is one of the most common finance decisions in the exam.

Internal and external sources

Short-term and long-term finance

Matching the source to the need matters: using a short-term overdraft to buy a building would be expensive and risky, while a long-term loan for a small cash-flow gap would be over the top.

Advantages and disadvantages

Why this matters

Sources of finance link to ownership (a company can raise share capital, a sole trader cannot), to cash flow (the right finance fills cash gaps), and to growth (expansion needs funding). It connects to revenue, costs and profit, because interest is a cost and retained profit is a source. Exam questions almost always ask you to recommend a source for a given need, where the amount, the time, the cost and the owner's attitude to debt and control are the deciding points.

Compare the cost of a loan with using retained profit

A business needs 20,000 for new equipment. A bank loan charges 8 percent interest a year over 5 years; alternatively it could use 20,000 of retained profit.

step Work out the interest cost of the loan

Simple interest each year is $20{,}000 \times 0.08 = 1{,}600$ . Over 5 years:

1{,}600 \times 5 = 8{,}000 \text{ in interest}.

step State the cost of using retained profit

Retained profit has no interest, so its direct money cost is 0. But it uses up 20,000 of the firm's cash reserve.

step Weigh the two and conclude

The loan costs an extra 8,000 in interest but lets the business keep its 20,000 cash reserve for emergencies or other opportunities. Retained profit avoids that 8,000 cost but leaves the firm with no reserve. So if the business values keeping cash available and can afford the repayments, the loan is worth the interest; if it has plenty of spare profit and wants to avoid debt and interest, retained profit is cheaper. The choice is a trade-off between cost and keeping cash in hand.

Try this

Q1. State one internal and one external source of finance. [2 marks]

Cue. Internal: retained profit (or owner's capital, selling assets). External: a bank loan (or overdraft, share capital, crowdfunding, trade credit).

Q2. Explain one disadvantage of raising finance by selling shares. [2 marks]

Cue. It gives away part of the ownership of the company, so investors gain a share of the profit and a say in decisions, reducing the original owner's control.

Exam-style practice questions

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

WJEC (Unit 1)3 marksExplain the difference between internal and external sources of finance.

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A 3-mark AO1 explain question. Reward a clear contrast with development.

Internal sources of finance come from within the business itself, for example using retained profit (profit kept from previous years), the owner's own savings, or selling unwanted assets. There is no interest to pay and no outside control.

External sources come from outside the business, for example a bank loan, an overdraft, selling shares, crowdfunding or trade credit. They can raise larger amounts, but often have to be repaid with interest or give away some control. Markers reward the definition of each plus the key contrast of inside versus outside the business.

WJEC (Unit 1)6 marksA small business needs to buy a delivery van. Analyse whether it should use a bank loan or retained profit to pay for it.

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A 6-mark AO1, AO2 and AO3 question. Weigh the two sources in context.

Bank loan: the business gets the money straight away and keeps its cash, but it must repay the loan with interest over time, raising its costs and its risk if sales fall.

Retained profit: using profit kept from previous years avoids interest and debt, but it uses up the firm's cash reserve, leaving less for emergencies or other opportunities.

Chain and judgement: a loan suits the business if it wants to keep its cash and can afford the repayments, while retained profit suits it if it has enough spare profit and wants to avoid interest and debt; for a small business wary of debt, retained profit may be safer if reserves allow. Markers reward developed points on both sources plus a justified recommendation.

Related dot points

Sources & how we know this

WJEC GCSE Business specification (Wales) — WJEC (2025)
WJEC GCSE Business (Wales) specification (3510) — WJEC (2017)