Revision and practice on the internal and external sources of finance available to a business, and their advantages and disadvantages.
Key vocabulary: Retained Profit, Overdraft, Crowdfunding, Sale of Assets
Businesses often want to expand and invest in the short, medium and long term, and have access to a wide variety of different finance options.
| Source | Description | Key advantage | Key disadvantage |
|---|---|---|---|
| SourceOwners' investment | DescriptionFinance provided directly by the business owner(s) from their personal savings — also known as owner's capital. | Key advantageNo debt or interest; owner keeps full control. | Key disadvantageLimited amount available; high personal risk. |
| SourceRetained profit | DescriptionProfit kept in the business rather than paid out as dividends, accumulated over time. | Key advantageNo interest or repayment obligations; keeps full ownership and control. | Key disadvantageOnly available if the business is already profitable; may cause shareholder dissatisfaction if dividends are cut. |
| SourceSale of assets | DescriptionSelling items of value the business owns but no longer needs, to raise cash. | Key advantageNo debt or interest; immediate cash injection. | Key disadvantageA one-off source; the asset is lost for good, possibly at a poor price. |
| SourceSale and leaseback | DescriptionSelling an asset the business owns (typically property) and immediately leasing it back from the new owner on a long-term basis. | Key advantageLarge cash injection while keeping use of the asset. | Key disadvantageLoses ownership of a valuable asset; creates a new, ongoing leasing cost. |
| SourceWorking capital | DescriptionThe money available for day-to-day operations, calculated as current assets minus current liabilities. | Key advantageImmediately available with no interest or external obligations. | Key disadvantageUsing it can weaken day-to-day operations; limited amount available. |
| Source | Description | Key advantage | Key disadvantage |
|---|---|---|---|
| SourceTrade credit | DescriptionCredit extended by suppliers allowing a business to buy goods and pay later, typically after 30-60 days. | Key advantageInterest-free; improves short-term cash flow. | Key disadvantageCan strain supplier relationships if payments run late; may lose early-payment discounts. |
| SourceShare capital | DescriptionThe amount shareholders have invested in the business by purchasing shares — a permanent source of financing. | Key advantageLarge amounts of finance can be raised, with no repayment or interest. | Key disadvantageExisting owners lose some control; shareholders expect dividends. |
| SourceOverdraft | DescriptionA short-term borrowing facility allowing a business to spend more than its bank balance, with interest charged on the overdrawn amount. | Key advantageFlexible — interest is only paid on the amount used, and it can be arranged quickly. | Key disadvantageBanks can recall the facility; interest costs add up if overused. |
| SourceLoans | DescriptionMoney borrowed from a bank or lender that must be repaid over time, plus interest. | Key advantageThe business keeps full ownership and control. | Key disadvantageRegular repayments must be made; a lender can seize a security asset if repayments are missed. |
| SourceBusiness angels | DescriptionA wealthy individual investor who provides capital to early-stage or growing businesses in exchange for equity (an ownership stake). | Key advantageBrings capital, expertise and useful networks, not just money. | Key disadvantageAngels typically want high returns and may push for changes to strategy or lose the entrepreneur some ownership. |
| SourcePrivate equity | DescriptionInvestment from specialist firms that raise large sums to buy a controlling stake in established businesses, aiming to restructure and improve them before selling on for a profit. | Key advantageAccess to capital and management expertise, with a clear strategic focus. | Key disadvantageLoss of control; can mean aggressive cost-cutting and increased debt. |
| SourceCrowdfunding | DescriptionRaising finance by collecting small amounts of money from a large number of people, usually through an online platform. | Key advantageBuilds market validation, marketing and public awareness alongside the money raised. | Key disadvantageNo guarantee of success; involves public exposure of the idea. |
Tembo launched a Kickstarter crowdfunding campaign in March 2026 and became an instant hit, raising over $2.1 million (around £1.65 million) within weeks. Crowdfunding suited a product launch like this well: rather than needing a bank to approve a loan or an investor to agree a valuation, Tembo could raise the money directly from thousands of future customers — while the scale of interest also worked as free market validation and marketing before a single unit had shipped.
Source: verified via search, September 2026 — Moneypenny's coverage of recent UK crowdfunding success stories.
When Superdry went private in July 2024 to carry out a three-year restructuring plan, founder and CEO Julian Dunkerton was reportedly wary of any deal that would add to the company's existing debt load. Instead, the rescue plan combined two other sources of finance: Dunkerton personally added £21 million through a new equity raise (owners' investment), and the company sold its Asian intellectual property rights for around £60 million (sale of assets). This shows how a business under financial pressure can choose sources of finance specifically to avoid increasing its gearing, even when a straightforward loan might otherwise seem the quickest option.
Source: verified via search, September 2026 — TechFundingNews and Global Banking & Finance coverage of Superdry's 2024 restructuring.
Tap a source of finance below, then tap the bucket it belongs in.
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Short, snappy recall questions — tap to reveal the answer.
Profit kept in the business rather than paid out as dividends.
Any one of: retained profit, owners' investment, sale of assets, working capital.
Any one of: a bank loan, share capital, an overdraft, crowdfunding.
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When recommending a source of finance in an exam answer, always link your choice to the business's size, stage of growth, and the amount and urgency of the finance needed — a start-up recommending a share flotation, or an established PLC recommending crowdfunding for a major investment, both suggest a weak understanding of the context.
Connecting to gearing (L1, this unit): Every external source of finance that involves debt (loans, overdrafts) increases a business's gearing, while share capital and internal sources do not. A strong exam answer on "which source of finance should a business use" often weighs this gearing impact directly against the objective of keeping the finance interest-free or keeping full control.
Before using this: AI tools can get facts or mark scheme details wrong, and quality varies by tool. Always check anything factual against your notes or ask your teacher.
Describe a fictional small business that needs to raise £50,000 for a specific reason (e.g. new equipment, a new store, or an app launch). Ask me to recommend the most suitable source of finance and a back-up option, with reasons. Then tell me whether my reasoning considered the business's size, control, and ability to repay — and suggest what I could add.