Edexcel Business A Level Paper 2 (Theme
2 & 3) - Exam Elaborations: Questions &
Answers
Sources of Finance
1. Define retained profits and explain their significance as a source of finance
for a business.
Retained profits represent the portion of a company's net profit that is kept by the
business rather than being distributed to shareholders as dividends. This internal
source of finance is highly significant as it provides readily available funds for
reinvestment in the business, such as for expansion, research and development, or
upgrading equipment, without incurring interest charges or diluting ownership.
2. What are owners' funds? Discuss the key benefits and disadvantages of
relying on this source of finance.
Owners' funds refer to the personal capital invested in the business by its owners.
Benefits:
Avoids interest on loans: Unlike external borrowing, there are no interest
payments associated with using owners' funds, reducing the overall cost of
finance.
Owners keep complete control: Relying on their own funds means owners
do not have to share ownership or decision-making with external investors.
Disadvantages:
Risk of personal loss: If the business fails, owners who have remortgaged
personal assets (like their house) to invest could face significant personal
financial losses.
Limit to amount raised: The amount of capital owners can personally
invest is often limited, potentially restricting growth opportunities.
3. Explain the concept of the sale of assets as a source of finance. When might
a business typically consider this option?
,The sale of assets involves a business raising capital by selling off some of its
existing assets, such as machinery, buildings, or land. This is often considered a
one-off solution, typically employed when a business is facing financial difficulties
and needs to generate immediate cash flow.
4. Provide examples of short-term finance and explain their typical uses.
Short-term finance refers to sources of funding needed for a period of less than one
year. An example is overdrafts, which allow a business to withdraw more money
than it has in its account, typically used to manage daily expenses and working
capital fluctuations.
5. Outline examples of medium-term finance and their common applications.
Medium-term finance covers funding with a repayment period of one to five years.
Examples include:
Loans: Amounts borrowed from financial institutions for specific purposes
like repairs or equipment purchases.
Hire purchase: Acquiring assets by paying installments over a period,
gaining ownership at the end.
Trade credit: Delaying payment to suppliers for goods or services received.
Debt factoring: Selling accounts receivable (invoices) to a third party at a
discount to improve immediate cash flow.
6. Describe various long-term finance options available to businesses,
highlighting their typical uses and repayment structures.
Long-term finance is used to fund major expenditures and is repaid over many
years. Examples include:
Issuing shares: Selling ownership stakes in the company (primarily for
limited companies).
Debentures: Long-term loans issued by a company, often with a fixed
interest rate.
Mortgages: Loans secured against property, used to finance land or
buildings.
Grants: Non-repayable funds provided by government bodies or other
organizations for specific purposes.
,7. Discuss the advantages and disadvantages of selling assets as a method of
raising finance.
Advantages:
Can provide a quick injection of cash.
Disadvantages:
Limited buyers: Finding suitable buyers for specific assets can be
challenging.
Advertising costs: Selling assets may involve incurring advertising and
other related expenses.
Sold cheaply: Assets may need to be sold below their market value for a
quick sale.
Reduces the operational capacity of the business if productive assets are
sold.
8. Evaluate the pros and cons of using loans as a source of finance for a
business.
Pros:
Can provide a significant amount of capital.
Repayment terms are usually fixed, aiding financial planning.
Cons:
High interest rates: Interest payments increase the overall cost of
borrowing.
Security required: Lenders often demand security (collateral) which can be
seized if repayments are not met.
Regular updates: Businesses may need to provide lenders with regular
financial updates.
9. Analyze the benefits and potential drawbacks of obtaining grants as a
source of finance.
Benefits:
, No repayment: Grants do not need to be paid back, making them a cost-
effective source of funding.
Drawbacks:
Conditions may apply: Grants often come with specific conditions that
must be met.
Potential recall: Grants may need to be repaid if the agreed conditions are
not fulfilled.
May not cover full amount: Grants may only cover a portion of the total
project cost.
The application process can be competitive and time-consuming.
10. Discuss the advantages and disadvantages of hire purchase and leasing as
financing options.
Hire Purchase:
Advantages:
Spreads the cost of an asset over time with manageable installments.
The business owns the asset at the end of the payment period.
Disadvantages:
Requires a deposit.
Interest is charged on the outstanding balance.
The asset can be repossessed if payments are not made.
Leasing:
Advantages:
Lower initial outlay compared to purchasing.
Regular payments are predictable.
May include maintenance and support services.
Allows access to assets without long-term commitment or ownership risks.
Disadvantages:
Does not lead to ownership of the asset.
2 & 3) - Exam Elaborations: Questions &
Answers
Sources of Finance
1. Define retained profits and explain their significance as a source of finance
for a business.
Retained profits represent the portion of a company's net profit that is kept by the
business rather than being distributed to shareholders as dividends. This internal
source of finance is highly significant as it provides readily available funds for
reinvestment in the business, such as for expansion, research and development, or
upgrading equipment, without incurring interest charges or diluting ownership.
2. What are owners' funds? Discuss the key benefits and disadvantages of
relying on this source of finance.
Owners' funds refer to the personal capital invested in the business by its owners.
Benefits:
Avoids interest on loans: Unlike external borrowing, there are no interest
payments associated with using owners' funds, reducing the overall cost of
finance.
Owners keep complete control: Relying on their own funds means owners
do not have to share ownership or decision-making with external investors.
Disadvantages:
Risk of personal loss: If the business fails, owners who have remortgaged
personal assets (like their house) to invest could face significant personal
financial losses.
Limit to amount raised: The amount of capital owners can personally
invest is often limited, potentially restricting growth opportunities.
3. Explain the concept of the sale of assets as a source of finance. When might
a business typically consider this option?
,The sale of assets involves a business raising capital by selling off some of its
existing assets, such as machinery, buildings, or land. This is often considered a
one-off solution, typically employed when a business is facing financial difficulties
and needs to generate immediate cash flow.
4. Provide examples of short-term finance and explain their typical uses.
Short-term finance refers to sources of funding needed for a period of less than one
year. An example is overdrafts, which allow a business to withdraw more money
than it has in its account, typically used to manage daily expenses and working
capital fluctuations.
5. Outline examples of medium-term finance and their common applications.
Medium-term finance covers funding with a repayment period of one to five years.
Examples include:
Loans: Amounts borrowed from financial institutions for specific purposes
like repairs or equipment purchases.
Hire purchase: Acquiring assets by paying installments over a period,
gaining ownership at the end.
Trade credit: Delaying payment to suppliers for goods or services received.
Debt factoring: Selling accounts receivable (invoices) to a third party at a
discount to improve immediate cash flow.
6. Describe various long-term finance options available to businesses,
highlighting their typical uses and repayment structures.
Long-term finance is used to fund major expenditures and is repaid over many
years. Examples include:
Issuing shares: Selling ownership stakes in the company (primarily for
limited companies).
Debentures: Long-term loans issued by a company, often with a fixed
interest rate.
Mortgages: Loans secured against property, used to finance land or
buildings.
Grants: Non-repayable funds provided by government bodies or other
organizations for specific purposes.
,7. Discuss the advantages and disadvantages of selling assets as a method of
raising finance.
Advantages:
Can provide a quick injection of cash.
Disadvantages:
Limited buyers: Finding suitable buyers for specific assets can be
challenging.
Advertising costs: Selling assets may involve incurring advertising and
other related expenses.
Sold cheaply: Assets may need to be sold below their market value for a
quick sale.
Reduces the operational capacity of the business if productive assets are
sold.
8. Evaluate the pros and cons of using loans as a source of finance for a
business.
Pros:
Can provide a significant amount of capital.
Repayment terms are usually fixed, aiding financial planning.
Cons:
High interest rates: Interest payments increase the overall cost of
borrowing.
Security required: Lenders often demand security (collateral) which can be
seized if repayments are not met.
Regular updates: Businesses may need to provide lenders with regular
financial updates.
9. Analyze the benefits and potential drawbacks of obtaining grants as a
source of finance.
Benefits:
, No repayment: Grants do not need to be paid back, making them a cost-
effective source of funding.
Drawbacks:
Conditions may apply: Grants often come with specific conditions that
must be met.
Potential recall: Grants may need to be repaid if the agreed conditions are
not fulfilled.
May not cover full amount: Grants may only cover a portion of the total
project cost.
The application process can be competitive and time-consuming.
10. Discuss the advantages and disadvantages of hire purchase and leasing as
financing options.
Hire Purchase:
Advantages:
Spreads the cost of an asset over time with manageable installments.
The business owns the asset at the end of the payment period.
Disadvantages:
Requires a deposit.
Interest is charged on the outstanding balance.
The asset can be repossessed if payments are not made.
Leasing:
Advantages:
Lower initial outlay compared to purchasing.
Regular payments are predictable.
May include maintenance and support services.
Allows access to assets without long-term commitment or ownership risks.
Disadvantages:
Does not lead to ownership of the asset.
