Finance Types

Edexcel A-Level Business — Theme 1 & 2

Internal Finance

Comes from within the business — no external borrowing required. Tap cards for detail.

Internal

Retained Profit

Profit saved from previous years, reinvested into the business.

Advantage: No interest, no loss of control. Risk: May not be enough for large investments. Only available if the business has been profitable.
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Internal

Sale of Assets

Selling items the business owns to raise cash.

Advantage: Quick way to raise funds. Risk: Lose the asset permanently. Only works if you have assets to sell.
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External Finance

Comes from outside the business — banks, investors, or the public.

External — Short Term

Overdraft

Spend more than what's in your bank account, up to a limit.

Use: Covers short-term cash flow gaps. Cost: Typically expensive — high interest rates. The bank can withdraw it at any time.
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External — Short/Medium

Loan

Borrow a fixed amount from a bank, repay over time with interest.

Advantage: Predictable repayments. Keep full ownership. Risk: Must repay regardless of business performance. Interest adds cost.
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External — Medium

Leasing

Rent an asset for a fixed period with monthly payments.

Advantage: No large upfront cost. Asset maintained by the leasing company. Risk: More expensive than buying outright over time. Never own the asset.
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External — Long Term

Mortgage

Long-term loan secured against property.

Why secured? The bank has less risk because they can repossess the property if you can't pay. This makes banks more likely to approve the loan.
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External — Equity

Business Angel

An individual who invests money AND expertise — like Dragon's Den.

Advantage: Get money plus mentorship and contacts. Risk: You give away a share of ownership. The angel has a say in decisions.
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External

Crowdfunding

A crowd of people fund your business or project online (e.g. Kickstarter, Seedrs).

Advantage: Test market demand. Build a customer base before launching. Risk: Need strong marketing. May need to give away equity or rewards.
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Equity vs Debt Finance

Equity Finance

  • Sell shares / part-ownership
  • No repayment required
  • Investor shares in profits
  • Loss of control & decision-making
  • E.g. Business angel, venture capital
VS

Debt Finance

  • Borrow money, repay with interest
  • Must repay regardless of success
  • Keep all profits
  • Retain full control
  • E.g. Loans, overdrafts, mortgages

Exam Tip

When evaluating finance choices, always consider the trade-off: equity finance means no repayment but you lose control; debt finance keeps control but you must repay regardless of performance. The "right" answer depends on the business context.

Grant vs Loan

Grant

  • Free money — does NOT need to be repaid
  • Usually from government or charities
  • Often has conditions attached
  • Competitive — hard to get
VS

Loan

  • MUST be repaid — with interest
  • Usually from a bank
  • More widely available
  • Can be secured or unsecured

The Crucial Difference

A grant does not need to be paid back. A loan must be repaid with interest. This is a favourite exam question — don't mix them up.

Secured vs Unsecured

Secured

  • Backed by an asset (e.g. property)
  • Bank can repossess if you default
  • Lower risk for lender = easier to get
  • Example: Mortgage
VS

Unsecured

  • No asset backing
  • Higher risk for lender
  • Harder to obtain, higher interest
  • Example: Personal loan, overdraft

Short Term vs Long Term

Short Term

  • Under 1 year
  • Cover cash flow gaps
  • Overdrafts, trade credit
  • Usually more expensive per £
VS

Long Term

  • Over 1 year (often 5-25+)
  • Fund growth & major purchases
  • Mortgages, share capital
  • Lower rate but longer commitment
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