Aims, revenue projections and cash-flow forecasts all point to the same question: where does the actual money come from? A short-term gap and a long-term investment call for very different answers.
This final sub-topic of 1.3 answers the practical question everything else in this topic has been building towards. A business's aims (1.3.1) often require investment to achieve; its revenue and cost calculations (1.3.2) reveal how much money is genuinely needed; and its cash-flow forecast (1.3.3) shows exactly when a gap might appear. This sub-topic covers where that finance can actually come from — and Edexcel splits sources into two categories based on how long the money is needed for.
Short-term finance is used to cover a brief period, most often a temporary cash-flow gap like the ones you studied in 1.3.3, rather than funding a major long-term investment.
Highly flexible, since interest is only charged on however much is actually used — but interest rates are usually higher than a standard loan, and a bank can reduce the limit or demand repayment with little notice.
Improves cash flow by delaying when money actually leaves the business, and typically costs nothing extra if paid within the agreed terms — but paying late repeatedly can damage a business's relationship with its supplier.
Long-term finance is used over a much longer period, often to fund a business's launch, a major piece of equipment, or a significant expansion.
Costs nothing in interest and doesn't hand any control to an outside party — but the amount available is limited, and it puts the owner's own personal finances directly at risk if the business fails.
Can provide large sums of money along with valuable expertise and mentorship from an experienced investor — but the entrepreneur gives up a genuine share of ownership and future profit in return.
Can raise very large sums without creating an obligation to repay it like a loan — but this option only exists for limited companies, and issuing new shares dilutes existing owners' control.
Provides a predictable repayment schedule and can fund a large investment — but comes with an interest cost (see 1.3.2) and usually requires security, with repayment due regardless of how the business performs.
Costs nothing in interest and doesn't dilute ownership — but it's only available once a business has actually been trading profitably, meaning a brand-new start-up can't rely on it at all.
Can also test genuine customer interest in a new idea before it fully launches — but the amount raised is never guaranteed, and running a successful campaign takes real time and public promotion effort.
Drag each source of finance into the correct category.
Standalone questions below are typical of Section A — no case study needed. The 6 and 9-mark questions are built around a Source Booklet–style case study, matching how Section B and C actually work in the real exam.
Which one of the following is a long-term source of finance?
A. Overdraft
B. Trade credit
C. Crowdfunding
D. None of the above
Answer: C.
Outline one long-term source of finance a business might use.
Structure guide: two linked points — eg "A business could use a bank loan (1), repaying it with interest over an agreed period of time (1)." Points must connect; unlinked points cap the mark at 1.
Explain one advantage to a business of using retained profit as a source of finance.
Structure guide: 1 mark identifying an advantage, plus 2 further marks developing it — eg "Retained profit does not need to be repaid with interest (1), unlike a bank loan (1), which reduces the overall cost to the business of financing its plans (1)."
Analyse the impact on Yusuf's business of accepting investment from the venture capitalist in exchange for a 25% share.
Structure guide: application (AO2) and analysis (AO3a) together — eg identify that Yusuf would give up 25% of ownership and future profit (AO2), then analyse how this provides the full £15,000 needed immediately along with the investor's expertise, but permanently reduces Yusuf's share of any future success, meaning the true cost of this option only becomes clear if the business goes on to do very well (AO3a).
Yusuf is considering two options to raise the remaining £15,000: launching a crowdfunding campaign, or accepting the venture capitalist's investment for a 25% share. Justify which option Yusuf should choose.
Structure guide: apply knowledge to Yusuf's specific situation (AO2), analyse points on both sides (AO3a) — crowdfunding keeps full ownership and can test genuine customer demand, but the full £15,000 is not guaranteed to be raised, while the venture capitalist guarantees the funds immediately but permanently costs Yusuf a quarter of the business — then reach a clear, justified choice (AO3b).