IGCSEAccountingCambridge (CIE)Revision Notes1. The Fundamentals of AccountingTypes of Business & Sources of FinanceSources of Finance

Syllabus Edition

First teaching 2025

First exams 2027

Sources of Finance (Cambridge (CIE) IGCSE Accounting): Revision Note

Exam code: 0452 & 0985

Dan Finlay

Last updated

Sources of finance

What are short-term sources of finance?

  • The main sources of short-term finance are:

    • bank overdrafts

    • trade credit

    • short-term loans

Bank overdrafts

  • A bank overdraft is where the bank allows a business to use more money than they have available in their bank account

Advantages

Disadvantages

  • Interest is only charged when the customer uses their overdraft

  • The overdraft is flexible and is available when needed

  • The funds are available immediately

  • Interest rates for overdrafts can be high

  • The business can become reliant on an overdraft

  • The amount available in the overdraft is not usually high

Trade credit

  • Trade credit is where the business purchases goods and assets but pays at a later date

Advantages

Disadvantages

  • This improves working capital as cash is kept in the business for longer

  • It is quick to arrange

  • It is usually interest-free if paid on time

  • It builds relationships with suppliers

  • There are penalties and interest for late payment

  • Late payments can damage relationships with suppliers

Short-term loans

  • A short-term loan is an amount of money that is borrowed by a business from a lender or bank and repaid within a year

    • These are also known as working capital loans

Advantages

Disadvantages

  • These give quick access to cash

  • Improves working capital

  • Able to budget the repayments as they are regular, fixed amounts

  • The business has to pay interest on the loan

  • The amount has to be repaid within a short time frame, such as a year

What are long-term sources of finance?

  • The main sources of long-term finance are:

    • Bank loan

    • Leasing

    • Hire purchase

    • Owner's or partner's capital

    • Introducing a new partner

    • Issue of shares

    • Debentures

Bank loans

  • A bank loan is an amount of money that is borrowed by a business from the bank and repaid over several years

Advantages

Disadvantages

  • Large amounts of cash are available to borrow

  • Able to budget the repayments as they are regular, fixed amounts

  • The owner(s) do not lose control of the business

  • Spreads the cost of an asset over several years

  • The business has to pay interest on the loan

  • The amount has to be repaid regardless of whether the business makes a profit or loss

  • The business may be required to offer an asset as security for the loan

  • There might be penalties for early repayments

Leasing

  • Leasing is where a business rents an asset from a company

    • They do not own the asset

Advantages

Disadvantages

  • No large upfront costs

  • Able to budget the payments as they are regular, fixed amounts

  • Access to expensive assets which the business might otherwise be unable to afford

  • Maintenance of the asset is usually included in the lease agreement

  • The business does not own the asset

  • It can cost more to lease an asset than to buy

Hire purchase

  • A hire purchase is where a business pays a deposit for an asset and then pays the rest of the value in instalments

    • They do not own the asset until it is fully paid off

Advantages

Disadvantages

  • It spreads the cost of the asset over several years

  • The business owns the asset at the end of the hire purchase

  • Able to budget the payments as they are regular, fixed amounts

  • It is more expensive than buying the asset outright

  • Instalments must be repaid regardless of the position of the business

  • A deposit is required

  • The asset can be repossessed if payments are missed

Owner's or partner's capital

  • The owner or a partner can introduce more of their own money as capital to the business

    • This is only available to sole traders and partnerships

Advantages

Disadvantages

  • The business does not need to pay interest

  • The business does not need to repay the amount

  • Avoids borrowing from external parties

  • The owner or partner can lose the money if the business goes bust

  • The owner or partner might not have large sums of money available to invest

Introducing a new partner

  • A new partner can be introduced with their capital

    • A partnership can introduce a new partner

    • Or a sole trader can form a partnership

Advantages

Disadvantages

  • The business does not need to pay interest

  • The business does not need to repay the amount

  • Avoids borrowing from external parties

  • New skills are introduced to the business

  • Profits are shared

  • Control of the business is diluted

  • There is potential for conflict between the partners

  • It feels more permanent as it is difficult to remove a partner

Issue of shares

  • A limited company can issue shares to raise funds

Advantages

Disadvantages

  • Large amounts can be raised

  • The business does not need to pay interest

  • The business does not need to repay the amount

  • Avoids borrowing from external parties

  • Control of the business might be diluted

  • It can be expensive to sell shares

  • Dividends might have to be paid

Debentures

  • A limited company can issue debentures to investors upon the loan of money

    • The amount is paid in full at an agreed date in the future

    • Interest is added to the amount owed each year

Advantages

Disadvantages

  • Large amounts can be raised

  • There is no loss of control

  • Interest can be budgeted as it is predictable

  • Interest must be paid regardless of profits

  • The amount must be repaid in the future

  • Security might be required

Examiner Tips and Tricks

This topic isn't explicitly on the specification. However, there have been multiple questions on past papers where students have been asked to evaluate the use of different sources of finance.

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Previous:Trading, Service & Manufacturing BusinessesNext:The Accounting Process
    Dan Finlay

    Author: Dan Finlay

    Expertise: Maths Subject Lead

    Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.