Outside sources of finance Cambridge IGCSE Business Studies revision
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In plain words
When the business cannot find enough money inside, it has to go to others: a bank, its suppliers, or new investors. Each wants something in return, whether interest, a share of the business, or prompt payment.
Choosing between them is one of the commonest exam questions in the subject.
6 things to know
- An overdraft lets a business spend more than it has in its bank account, up to a limit. It is flexible and short-term, but the interest rate is high.
- Trade credit means buying supplies now and paying later. It costs no interest, but discounts for early payment are lost.
- A bank loan is a fixed sum repaid with interest over a set time. The bank may ask for security, and interest is owed whether or not the business makes a profit.
- Share capital is money raised by selling shares in a limited company. It never has to be repaid and carries no interest, but ownership is spread and control may be lost.
- Venture capital comes from investors who back small, risky businesses in return for a share of the ownership. Crowdfunding collects small amounts from many people, usually online. Micro-finance is very small loans to people who cannot borrow from a bank.
- The choice depends on how much is needed, for how long, what kind of business it is, how much it has already borrowed, and whether the owners want to keep control.
Tips and tricks
- Only limited companies can sell shares. Do not recommend a share issue to a sole trader or a partnership.
- A loan keeps control but adds risk. Shares add no risk but give away control. Most evaluation turns on that trade-off.
It lands in your notebook with its questions as flashcards.
Outside sources of finance: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is the most suitable source of finance for a short-term shortage of cash?
It is flexible and meant for short periods.
Which source of finance is available only to limited companies?
Only companies have shares to sell.
Which is a disadvantage of raising finance by selling shares?
New shareholders become part-owners.
Trade credit means
The supplier allows time to pay.
Crowdfunding is
Many small contributions add up to the sum needed.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Outside sources of finance
Cambridge IGCSE Business Studies 0450 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Explain what is meant by an overdraft.[2]
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An agreement with a bank that allows a business to spend more money than it has in its account, up to an agreed limit.
Explain one advantage and one disadvantage of a bank loan as a source of finance for a new factory.[3]
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Advantage: a large sum is available at once and is repaid over many years, which suits a long-term need, and the owners keep control. Disadvantage: interest must be paid, and the repayments are due even when profits are low.
Explain why a public limited company might sell new shares to finance expansion, and not borrow.[3]
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Money raised from shares does not have to be repaid and no interest is charged, so there is less risk than with a loan. The cost is that there are more shareholders to share the profits and the control.
Answers: Outside sources of finance
- 1. An agreement with a bank that allows a business to spend more money than it has in its account, up to an agreed limit.
- 2. Advantage: a large sum is available at once and is repaid over many years, which suits a long-term need, and the owners keep control. Disadvantage: interest must be paid, and the repayments are due even when profits are low.
- 3. Money raised from shares does not have to be repaid and no interest is charged, so there is less risk than with a loan. The cost is that there are more shareholders to share the profits and the control.