Sources of Finance

Revise Sources of Finance for Business (Edexcel) 4BS1 (O Level) — revision notes and instant AI marking.

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Edexcel IGCSE Business · Finance

Sources of Finance

The Big Idea Every business needs money (capital) to start up, run day-to-day, and grow — and that money either comes from inside the business (internal) or from outside it (external), and picking the right source depends on how much is needed, for how long, and what it's for.

1. Summary — The Whole Chapter at a Glance Read this first. Every bullet below gets its own deep-dive further down.

Why finance is needed: short-term (day-to-day bills, wages, suppliers) vs long-term (buildings, machinery, R&D, acquisitions), plus start-up needs and growth needs.
Internal finance = money from within the business: personal savings, retained profit, sale of assets. Cheap and fast, but limited in amount and comes with an opportunity cost.
External finance = money from outside the business: overdrafts, trade credit, loans/mortgages, share capital, venture capital, crowdfunding. More available, but often costs interest or a slice of ownership.
Choosing the right source depends on: timescale, cost, legal structure, control, purpose of the finance, and how much debt the business already has (gearing).
Exam questions almost always ask you to justify the single best source for a specific business scenario — not just list options.

2. The Need for Finance Why does a business need money in the first place?

Why Businesses Need Finance

Think of a business like a car. It needs fuel just to keep running day-to-day (short-term finance) — but it also occasionally needs a full engine upgrade to go further and faster (long-term finance). Business finance is also called "capital." It's needed for four broad reasons:

Start-up: buying initial stock, equipping stores/offices, advertising the launch.
Short-term/day-to-day: paying wages, paying suppliers, covering bills.
Long-term: purchasing property, upgrading machinery, investing in R&D.
Growth: extending property, increasing distribution, expanding the workforce.

Plain-English Rule If the need is small and recurring (this week's wages), it's short-term finance. If the need is large and one-off (a new factory), it's long-term finance. Get this distinction right first — almost every exam question hinges on it.

Short-term finance needs: These fund day-to-day liabilities — paying bills, suppliers, and wages. They're relatively small amounts, rarely needed beyond a year. When sales revenue alone doesn't cover these costs, businesses turn to sources like overdrafts or trade credit.

Long-term finance needs: These fund the purchase of non-current assets (buildings, equipment) or acquiring other businesses. They're large sums needed for a significant period of time. If retained profit isn't enough, businesses look at long-term loans, mortgages, or raising share capital.

Worked Example Apple's R&D spending in 2023 was $29.915 billion — a 13.96% increase from 2022 — poured into AI and product innovation. That's a textbook example of long-term finance: a huge sum, committed over a long horizon, to fund growth rather than pay this month's electricity bill.

Practice Question

A bakery needs £2,000 to cover next month's flour and staff wages, and separately needs £150,000 to buy a new industrial oven. Classify each need and explain why.