Sources of Finance for Small Businesses (SQA National 5 Business Management): Revision Note
Exam code: X810 75
Introduction to sources of finance
All businesses need finance to get started, allow them to grow, fund capital investments and their continuing activity
Start-up capital
Is the finance needed by a new business to pay for fixed assets and current assets before it can begin trading
A business usually estimates the amount of start-up capital they need in the business plan
Many small new businesses will get a start-up loan to cover these initial costs
Funds for growth
As a business grows more finance may be needed for capital expenditure
It may require more equipment, buildings, IT equipment or vehicles, which will allow the business to increase output
If a business wants to grow by developing a new product, it will need to spend large amounts of capital on research and development (R&D)
Owner's capital
Personal savings are a key source of funds when a business starts up
Owners may introduce their savings or another lump sum, e.g. money received following a redundancy
Owners may invest more as the business grows or if there is a specific need, e.g. a short-term cash flow problem
Taking on a new partner means new owner's capital is introduced into a small business
Evaluating the use of owner's capital
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Where do small businesses secure finance from?
Many small businesses rely on short-term borrowing methods that operate internally within their banking arrangements, such as overdrafts or loans secured against business assets
1. Bank overdraft
An overdraft allows a business to withdraw more money than is in its account, up to an agreed limit
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2. Bank loan
A bank loan provides a fixed amount of money that is repaid with interest over a set period
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3. Trade credit
Trade credit is when suppliers allow a business to buy goods now and pay later, usually within 30–60 days
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Helps improve short-term cash flow. | Missed payments may damage supplier relationships. |
No interest if paid within the agreed period. | May lose early payment discounts. |
Allows businesses to sell goods before payment is due. | Usually only available to trusted or established firms. |
4. Hire purchase
Hire purchase allows a business to buy an asset and pay for it over time, while using it immediately
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Examiner Tips and Tricks
Students often overlook why small businesses struggle to raise funds. Banks may see them as risky; they lack collateral, and investors prefer larger firms. Examiners reward answers that explain these barriers rather than simply listing unavailable finance options
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