EDEXCEL GCSE BUSINESS · PAPER 1
Exam Practice: Sources of Business Finance
Sources of business finance · Putting a business idea into practice · Lesson 5 of 5 · 16 marks · 30 minutes
Name Date
Answer all questions. Use the context of the business in the question where one is given.
Question 1 DEFINE [1 mark]
Define the term 'trade credit'.
Question 2 STATE [1 mark]
State one long-term source of finance for a small business.
Question 3 OUTLINE [2 marks]
Outline one disadvantage to a business of using an overdraft.
Question 4 EXPLAIN [3 marks]
Explain one benefit to a new business of using crowdfunding.
Question 5 JUSTIFY [9 marks]
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SOURCE Tom is starting a mobile coffee van business. He needs £18,000 to buy and fit out the van. He has £5,000 of savings. He has two options for the remaining £13,000. Option 1: A bank loan over four years at 9% interest. Option 2: Sell a 30% share of the business to a friend who has experience of running a café. |
Justify which one of these two options Tom should choose.
Answers
Check your answer only once you have written one.
Question 1 [1 mark]
When a supplier allows a business to pay for goods some time after it has received them.
▸ Buy now / pay supplier later 1 mark
Question 2 [1 mark]
A bank loan.
▸ Any one of: personal savings; venture capital; share capital; loan; retained profit; crowdfunding 1 mark
Question 3 [2 marks]
Interest rates on overdrafts are high (1), so borrowing this way for a long time increases the business's costs and reduces its profit (1).
▸ A disadvantage identified, e.g. high interest / can be withdrawn at short notice 1 mark
▸ Developed: the effect on the business 1 mark
Question 4 [3 marks]
It can test demand for the product (1). If many people are willing to invest or pre-order, it shows the owner that customers want it (1). This reduces the risk of launching a product nobody buys, as well as raising the money needed to start (1).
▸ A benefit identified, e.g. tests demand / no interest / publicity / raises money without a bank 1 mark
▸ First linked point of explanation 1 mark
▸ Second linked point of explanation 1 mark
Question 5 [9 marks]
Option 1, a bank loan, lets Tom keep full control and all of the profit, because the bank does not own any of the business. The repayments are fixed, so he can plan his cash flow. However, he must pay interest on top of the £13,000, and the repayments must be made every month even when sales are low, which is risky for a new business with no track record. Option 2, selling a 30% share, means there is nothing to repay and no interest, so his cash flow in the early months is safer. His friend's café experience could also help him avoid mistakes. But Tom would give up 30% of his future profit for as long as the business runs, and would have to share decisions. On balance Tom should choose Option 1, because a coffee van is a relatively simple business with steady daily sales, so he should be able to cover the repayments, and over time the interest will cost him less than giving away 30% of the profit. However, this depends on his cash-flow forecast showing he can make the repayments in quieter winter months.
▸ AO2 (Application, 3 marks): uses Tom's context - the van, £5,000 savings, £13,000 needed, 9% interest, a 30% share Level 1-3
▸ AO3a (Analysis, 3 marks): chains of reasoning about each option Level 1-3
▸ AO3b (Evaluation, 3 marks): a justified choice with a supported judgement, e.g. "it depends on" Level 1-3