IGCSE Business: Business finance (Cambridge 0264) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 5.1, Business finance, of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029. All businesses are invented. Revise first with the study guide and the revision notes. The course hub and the printable checklist track your progress. Not sure where to start? Try the free diagnostics.

Questions

1. State three reasons why a business may need finance. [3]

2. Define the term working capital. [2]

3. Identify one short-term and one long-term finance need of a business. [2]

4. Pendleford Kitchens has inventory of £21,000, trade receivables of £14,000 and cash of £2,500. It owes trade payables of £26,000 and has a bank overdraft of £18,500.

(a) Calculate the working capital of Pendleford Kitchens. [3] (b) Explain one problem the business may face because of its working capital. [2]

5. State two internal sources of finance. [2]

6. Rowanby Cycles buys a delivery van with a cash price of £16,000 on hire purchase. It pays a deposit of £3,200 and 30 monthly instalments of £460.

(a) Calculate the total amount paid. [2] (b) Calculate how much more this is than the cash price. [1] (c) Explain one difference between hire purchase and leasing. [2]

7. Explain one advantage and one disadvantage of a bank overdraft as a source of finance. [4]

8. Millbrook Gate Games needs £40,000 of start-up capital. The owner provides £14,000. A crowdfunding campaign raises £16,000 from 320 backers. A government grant provides the remaining £10,000.

(a) Calculate the owner’s share of the start-up capital as a percentage. [2] (b) Calculate the average amount given by each backer. [1] (c) Explain one risk to Millbrook Gate Games of relying on crowdfunding. [2] (d) Explain one advantage of a government grant compared with a bank loan. [2]

9. Choose two of the factors that affect the selection of finance, and for each explain how it could change the decision. [4]

10. Aldermoor Joinery is a partnership. The partners want £42,000 for a computer-controlled cutting machine that they expect to use for eight years. They can put in £12,000 of retained profit, have no other borrowing, and have little spare cash for a large deposit. Recommend a source of finance for the remaining £30,000 and justify your choice. [6]

11. Ludlowe Print Ltd needs £120,000 for a new printing press. It has 90,000 shares. Option A is to issue 60,000 new shares at £2 each. Option B is a bank loan of £120,000 at 7% interest a year. The business currently makes a profit of £30,000 a year, and you should assume it would stay at this level before any loan interest.

(a) Calculate the yearly interest on the loan. [2] (b) Calculate the percentage of the company owned by the new shareholders under Option A. [2] (c) Evaluate which option Ludlowe Print Ltd should choose. [6]

12. Give one benefit and one drawback of a business raising money by selling assets it no longer wants. [4]

Answers

1. Any three, one mark each: start-up capital [1]; capital for expansion or growth [1]; replacing existing non-current assets [1]. (Investing in new technology and working capital are also accepted.) [3] Examiner insight: “State” asks for the point only, so spend no time on explanation. Repeating the same reason in different words earns nothing extra.

2. The money a business has available to pay its everyday expenses [1], found by current assets minus current liabilities [1]. [2] Examiner insight: “Money in the bank” or “cash” alone is a common weak answer. Mentioning the formula or the idea of everyday bills shows you know it is wider than cash.

3. Short-term: for example paying wages or suppliers, or bridging a gap before customers pay [1]. Long-term: for example buying a new building or machine, or expanding to a second site [1]. [2] Examiner insight: Give one of each, not two of one kind. Linking the need to a time period shows you understand the difference.

4. (a) Current assets = 21,000 + 14,000 + 2,500 = £37,500 [1]. Current liabilities = 26,000 + 18,500 = £44,500 [1]. Working capital = 37,500 - 44,500 = -£7,000 [1]. (b) Working capital is negative, so the business owes more in the short term than it has available [1]. It may struggle to pay suppliers or wages on time, which could damage supplier relationships or lead to insolvency [1]. [2] Examiner insight: Show both totals and the subtraction so your method is visible. In part (b), a problem alone is not enough: add what could happen as a result.

5. Owners’ investment [1]; retained profit [1]. (Sale of unwanted assets and working capital are also accepted.) [2] Examiner insight: Do not offer a loan or an overdraft here. Both come from outside the business, so they are external sources.

6. (a) 30 x £460 = £13,800 [1]. Total = 3,200 + 13,800 = £17,000 [1]. (b) 17,000 - 16,000 = £1,000 [1]. (c) With hire purchase the business becomes the owner of the van after the final payment [1]. With leasing it only rents the van and never owns it [1]. [2] Examiner insight: Compare both methods in your answer. Describing only hire purchase leaves the difference unstated.

7. Advantage: it is flexible, because the business borrows only what it needs and pays interest only on the amount drawn [1], so it suits a short gap in cash flow [1]. Disadvantage: interest rates can be high if the overdraft is used for a long time [1], or the bank can ask for repayment at short notice, which could leave the business short of cash [1]. [4] Examiner insight: Each of the two points needs a reason or consequence to earn full credit. A bare “it is flexible” is only the start of a point.

8. (a) 14,000 / 40,000 x 100 [1] = 35% [1]. (b) 16,000 / 320 = £50 [1]. (c) The campaign might not reach its target [1], so the business would have to find the missing money elsewhere or delay opening [1]. (Accept: backers may expect rewards that add to costs.) (d) A grant does not have to be repaid [1], whereas a bank loan must be repaid with interest, so the grant leaves more cash in the business [1]. [2] Examiner insight: In (c) and (d), name Millbrook Gate Games’ situation or the effect on its cash. Generic statements are weaker than ones tied to the case.

9. Any two factors, each with an explanation: size of business, legal form, amount required, length of time, existing loans, cost, or purpose. For example: legal form [1], because only a company can issue shares so a sole trader must use other sources [1]. Amount required [1], because a small sum may be met by trade credit but a large sum may need a long-term loan or shares [1]. [4] Examiner insight: A list of factors scores only for naming them. The reasoning, saying how each factor changes the choice, earns the rest.

10. Recommendation: a long-term bank loan of £30,000 [1]. The machine is a long-term need of eight years, so finance of a similar length matches the purpose [1]. A partnership cannot issue shares, so the legal form rules that source out [1]. An overdraft would be costly and could be recalled at short notice, so it is unsuitable for a machine [1]. With no existing loans, the partners can probably borrow, so repayments should be affordable [1]. Using £12,000 of retained profit first cuts the amount borrowed and the interest paid [1]. [6] Examiner insight: Pick one source, say why it fits this case, and say why a different source is a weaker choice. Listing every source without choosing weakens a “recommend and justify” answer.

11. (a) 120,000 x 7% [1] = £8,400 a year [1]. (b) 60,000 / (90,000 + 60,000) [1] = 40% [1]. (c) For Option A: there is no repayment and no interest, so the profit of £30,000 stays in the business [1]. Against Option A: the new shareholders own 40%, so the existing owners lose some control and share future profit [1]. For Option B: the owners keep full ownership [1]. Against Option B: interest of £8,400 leaves profit of 30,000 - 8,400 = £21,600, and the loan must be repaid even if profit falls [1]. Judgement, for example: a loan is better if the owners value control and profit is steady, because £21,600 still remains [1]. Shares are better if the owners fear repayment pressure [1]. [6] Examiner insight: “Evaluate” needs both options weighed and a decision with a reason. A one-sided answer, or a conclusion that just repeats a point, usually leaves marks unclaimed.

12. Advantage: it raises cash without borrowing, so there is no interest or repayment [1], and it removes an item the business no longer needs, which may have running costs [1]. Disadvantage: it is usually a one-off source and cannot be repeated each year [1], and the business may have to accept a low price if it needs the money quickly [1]. [4] Examiner insight: This is an “unwanted” asset question. Say why the sale does not harm the business, as selling an asset it still needs would be a different problem.

Where marks are usually lost

• Writing “money in the bank” instead of current assets less current liabilities when defining working capital.
• Giving an external source, such as a loan, when asked for internal sources.
• Not showing working in calculations and leaving out units such as £ or %.
• Recommending a source but not applying case facts such as legal form, amount or length of time.
• Describing a source with no consequence for cost, cash flow or control.
• Mixing up leasing and hire purchase, or overdraft and bank loan.
• Giving only advantages when asked to evaluate.
• Forgetting that a loan must be repaid with interest and a grant does not.

Next steps

• Recap with the revision notes and the study guide.
• Open the Cambridge IGCSE Business course page and tick off your checklist.
• Take the free 10-minute diagnostics to find your next weak area.
• Book a free trial class.

Frequently asked questions

What are common mistakes on business finance questions in IGCSE Business 0264? Students often define working capital as “money in the bank”, give an external source such as a loan when asked for internal sources, mix up leasing with hire purchase or an overdraft with a bank loan, and recommend a source without applying case facts such as legal form, amount or length of need. Forgetting that a loan must be repaid with interest and a grant does not also loses marks.

How do you work out the total cost of hire purchase? Add the deposit to the total of all the instalments. Subtract the cash price from this total to find the extra cost of buying on hire purchase.

How should you answer a recommend question on a source of finance? Recommend one source and justify it using facts from the case, such as the business’s legal form, the amount needed, how long it is needed for and any existing loans. Give a reason why it is better than an alternative.

Which section of the Cambridge IGCSE Business 0264 syllabus covers business finance? Business finance is section 5.1, covering the need for business finance (5.1.1) and the main sources of finance (5.1.2).

Official syllabus

These questions follow the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029, published by Cambridge University Press & Assessment, section 5.1 Business finance.