National 5BusinessSQABusiness ManagementRevision NotesManagement of FinanceSources of FinanceSources of Finance for Companies

Sources of Finance for Companies (SQA National 5 Business Management): Revision Note

Exam code: X810 75

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Retained profit

  • This is profit that has been kept within the business rather than paid out to shareholders as dividends

  • It can be used for a range of purposes, such as to buy new equipment, fund expansion or develop new products

Evaluating the use of retained profit

Advantages

Disadvantages

  • No interest to pay, so it’s a cheap source of finance

  • The company keeps full control - no borrowing or new shareholders

  • Quick to access, with no lengthy approval process

  • Only available if the company has made sufficient profit

  • Using profits for investment may disappoint shareholders expecting dividends

  • Once used, funds are no longer available for emergencies

Borrowing for companies

  • Companies can borrow money through bank loans or mortgages, specifically to purchase property

  • Money borrowed is repaid over time with interest

Evaluating the use of borrowing

Advantages

Disadvantages

  • Allows large sums to be raised quickly

  • Ownership and control of the business are retained

  • Interest payments are usually tax-deductible

  • Must be repaid with interest, increasing total cost

  • May require collateral, such as property

  • Increases financial risk if the company struggles to make repayments

Issuing shares

  • Companies can raise finance by selling shares to new or existing investors

  • This increases the company’s capital base and spreads ownership among shareholders

Evaluating the issue of shares

Advantages

Disadvantages

  • Can raise very large amounts of money

  • No interest to pay — shareholders are rewarded through dividends instead

  • Operating as a company can improve the business’s credibility

  • Original owners may lose control if too many new shares are sold

  • Shareholders expect regular dividends, which reduces retained profit

  • The process is expensive and time-consuming due to legal and administrative requirements

Grants

  • A grant is money given to a business by the government or another organisation to help it achieve specific goals, such as job creation, innovation or environmental improvement

  • Grants do not need to be repaid, but businesses must meet certain conditions to receive them

Evaluating the use of grants

Advantages

Disadvantages

  • Does not have to be repaid, reducing financial pressure

  • Encourages investment in areas such as sustainability or job creation

  • Improves reputation by showing the business contributes to community or environmental goals

  • Can be difficult and competitive to obtain

  • Often requires detailed application forms and progress reports

  • Funds are usually restricted to specific uses, limiting flexibility

Examiner Tips and Tricks

A common mistake is thinking companies only borrow from banks. In fact, they can sell shares, issue debentures, or reinvest profits. Show you understand that access to wider finance options comes from limited liability and investor confidence

Case Study

Stylised thistle emblem in pink and orange within a circle, above bold teal text reading "Thistle Threads" on a cream background.

Thistle Threads Ltd is a medium-sized textile manufacturer based in Stirling, employing around 75 staff.

The company wanted to launch a new eco-friendly clothing line made from organic and recycled materials but lacked the funds to purchase modern, energy-efficient equipment.

Thistle Threads successfully applied for a Scottish Government environmental grant worth £80,000.

This funding allowed the firm to install new low-energy weaving machines and to train employees in sustainable production techniques.

  • The new machinery reduced the company’s energy consumption by 25%, lowering costs and carbon emissions.

  • Thistle Threads gained positive publicity in the Scottish press and won new supply contracts with ethical retailers.

  • The grant meant the company could expand production without borrowing or issuing new shares, helping it stay financially stable.

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.