Worksheet 25: Sources of finance

Section 1: The need for finance

Answer the questions below.

1. Explain what is meant by the term ‘short-term needs’ and give one example of why a business
might need finance in the short term.
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2. Explain what is meant by the term ‘long-term needs’ and give one example of why a business
might need finance in the long term.
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3. Explain what is meant by the term ‘to start up’ and give 1 example of why a business might
need finance to start up.
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4. There are four reasons a business might want to expand list what they are.
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Section 2: Internal and External Sources of finance

Sort the sources of finance below into internal or external sources.

Venture capital Retained profit Share capital

Overdraft Trade payables Selling assets

Personal savings Crowdfunding Loan capital

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Section 3: Definitions of sources of finance
Identify the source of finance and if it is an internal source or an external source based on its
definition.

Definition Source of Internal/external

Finance
Owners contribution they already have saved usually in a bank.
This could be from redundancy money or loans or gifts from
relatives
Profit that has been kept in the business from previous years of
trading
Using the value of unwanted assets to generate finance.
Sometimes these assets can be leased back
Agreement with a bank where a business can spend more money
than they have
Buying resources from suppliers and paying for them later
(sometimes called trade credit)
Borrowing money usually from a bank. These can be unsecured,
but most require collateral – longer-term versions are called
mortgages or debentures
When a limited company sells a portion of its business to a new
owner
Specialist investors or individuals who provide money for business
purposes
Where a large number of individuals invest in a business venture
using an online platform and therefore avoiding using banks

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Section 4: Advantages and disadvantages of different sources of finance
Provide an advantage and disadvantage for each sources of finance listed.

Source of Finance Advantages Disadvantages

Personal savings

Retained profit

Selling assets

Overdraft

Trade payables

Loan capital

Share capital

Venture capital

Crowdfunding

© Pearson Education Ltd 2017. Copying permitted for purchasing institution only. This material is not copyright free.