Selecting Sources of Finance (Cambridge (CIE) A Level Business): Revision Note
Exam code: 9609
Factors affecting the choice of sources of finance
Managers must consider a range of factors before deciding upon the type and source of finance required
They may need to use more than one source of finance at the same time
Factors affecting the choice of finance

Factor | Explanation |
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What is the purpose of the finance? |
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How long is the finance required for and when can it be paid back? |
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How much finance is needed? |
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What is the legal structure of the business? |
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How much risk is involved? |
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How much control and ownership does the company want to keep? |
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Reducing the risk of being unable to raise finance
The risk of not being able to raise the finance can be reduced in several ways
Bank loans will most likely be approved when
A business presents a convincing business plan, including a cash-flow statement, and income statement for the last time period
Existing sources of external finance are minimal and being managed effectively
A business has collateral to reduce risk to the bank
Investment from shareholders will most likely happen when
The share price is improving
Dividends are generous
The company has good profit potential and is planning to grow
Alternative investments are less attractive
Choosing suitable sources of finance
Finance managers frequently have to make recommendations to their CEOs about the most suitable sources of finance to use
Example 1: Private Limited Company
Case Study
Oaky-Cokey Ltd is a very successful private limited company that manufactures and sells wooden educational toys. It has been running for 15 years and has an excellent reputation
Oaky-Cokey has previously reinvested profits to fund expansion but now needs more financing to fund growth into new markets
Key considerations
Oaky-Cokey is a limited company, so selling shares to family and friends is an option to raise a limited amount
With 15 years of success, it is less of a risk than a new start-up, so a bank loan could be obtained
The scenario indicates that reinvesting profits will not be enough to finance growth plans
Recommendation
A bank loan could be easy to obtain due to business success over the last 15 years
Repayments are spread over several years, and interest must be paid
The business could issue new shares to existing shareholders, who may increase their investment due to business success
Family and friends may want to be part of its exciting growth plans
The decision will depend upon how much control and ownership the business owner may lose by issuing more shares
Most finance managers would recommend obtaining a bank loan, as this is often preferable to losing ownership and a share of future profits
Example 2: Sole trader
Case Study
Hoopla is a Warsaw-based retail store selling fashion trainers
It has sold large quantities of stock since an influencer promoted the store on TikTok and Instagram. It needs to quickly replenish its stock
Its sole trader owner, Tobias, is considering using his existing overdraft or trade credit
Key considerations
New stock is needed quickly so the existing overdraft facility on his bank account could be an instant source of finance
Trade credit means he would not have to pay for stock straight away, which would avoid cashflow problems as stock can be sold before payment to the supplier is due
Recommendation
An overdraft is a short-term source of finance and Tobias will have to pay interest on the amount that he uses
Trade credit would ease financial pressure as stock is replenished and he may receive a discount when he sets up the agreement
Most finance managers would recommend to Tobias that he first seek trade credit
If he is unable to secure that, then he should consider using his overdraft facility
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