IGCSE Business: Business finance (Cambridge 0264) – Revision Notes

These notes condense section 5.1, Business finance, of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029 (5.1.1 The need for business finance and 5.1.2 The main sources of finance). For full explanations read the study guide, then try the practice questions. The course hub and the printable checklist track progress, and the free diagnostics show your weak spots. All businesses named are invented.

Why businesses need finance (5.1.1)

Reason	Meaning in one line
Start-up capital	Money to open: premises, equipment, first inventory
Expansion or growth	Money for new sites, products or markets
Replacing non-current assets	Worn-out machinery, vehicles or buildings must be renewed
New technology	Spending now for lower costs or better quality later
Working capital	Money for everyday costs such as wages and materials

Short-term need: about a year or less, for running costs or a gap before customers pay. Long-term need: several years, for non-current assets, growth or start-up.

Rule: match the length of the finance to the length of the need.

Working capital

• Working capital = current assets - current liabilities.
• Current assets: inventory, trade receivables, cash.
• Current liabilities: trade payables, overdraft.
• It pays everyday bills. A profitable business can still run out of working capital and fail.
• Too little: late payments, lost supplier trust, possible insolvency.
• Too much: idle money that could earn more if invested.

Small reminder: current assets £12,200 and current liabilities £7,700 give working capital of £4,500.

Sources of finance (5.1.2)

Internal sources

Source	For	Against
Owners’ investment	No interest, no outside control	Limited by savings, personal money at risk
Retained profit	Cheap, no repayment	Only when profitable, less paid to owners
Sale of unwanted assets	Cash without borrowing	One-off, may sell below value
Working capital	Frees cash already in the business	Leaves less cushion for bills

External sources

Source	What it is	For	Against
Share capital	Company sells shares	Large sums, no repayment	Shared ownership and profits
Venture capital	Specialist investor takes a stake	Big sums, advice	Owners lose some control
Bank overdraft	Spend beyond account balance up to a limit	Flexible, interest only on amount used	Dear if kept long, can be recalled
Leasing	Rent an asset	Low start cost, no ownership worry	Never owned, dearer in total
Hire purchase	Deposit then instalments	Spread cost, own at the end	Dearer than paying cash
Bank loan	Fixed sum repaid with interest	Predictable repayments	Repay even in a bad year, may need security
Trade credit	Pay supplier later	Free if on time	Supplier may refuse future credit
Government grants	Money given, not repaid	No repayment	Conditions, slow to obtain
Crowdfunding	Many small contributions online	Tests demand, builds followers	May miss target

Internal against external

• Internal: cheaper and quicker, owners keep control, but the amount is limited.
• External: larger amounts, but costs, repayment pressure or lost control.

Must-know distinctions

• Leasing and hire purchase. Leasing is renting with no ownership. Hire purchase ends with the business owning the asset.
• Overdraft and loan. An overdraft is flexible and short-term. A loan is a fixed sum for a set period.
• Shares and loans. Shares need no repayment but share ownership. Loans keep ownership but must be repaid with interest.
• Grant and loan. A grant is not repaid. A loan is.
• Working capital and cash. Working capital includes inventory and receivables, not only cash.
• Retained profit and cash. Retained profit may already be spent on assets.

Choosing a source of finance

Method in steps:

1. Say what the money is for (purpose) and how long it is needed (length of time).
2. Check the amount required.
3. Check the legal form: only a company can issue shares.
4. Check size of business and existing loans: can it borrow more?
5. Compare the cost of each option.
6. Recommend one source and give a reason, then say why another source is weaker.

Factors to consider: size of business, legal form of business, amount required, length of time, existing loans, cost, purpose.

Quick matching guide:

Situation	Likely sensible source
Short gap before customers pay	Overdraft or trade credit
Big machine, spread the cost	Hire purchase or leasing
Long-term expansion of a small firm	Bank loan, with owner’s funds
Large growth plan by a company	Issue shares or venture capital
New idea needing proof of demand	Crowdfunding
Use of money already earned	Retained profit

Treat this as a starting point. Always check the facts in the question, because they can change the answer.

Answering the question types

Command word	What to do
State, identify	Give the point briefly, with no explanation
Define	Give the meaning in a sentence
Calculate	Show the working, then the answer with units
Explain	Give a point, then a reason or consequence
Analyse	Give a point, develop it with a chain of reasoning, and use the case
Recommend and justify	Choose one source and give reasons linked to the case
Evaluate	Weigh both sides, then reach a judgement and say what it depends on

A good chain for a finance answer: the source, what it gives the business, then the effect on cash, cost or control. For example: a bank loan gives a fixed sum, so the business can plan repayments, but interest must be paid even in a weak year, which reduces profit.

Use the case. If the stem mentions a sole trader, a company, an existing loan or a short gap in cash, one of your points should refer to it.

Worked reminders

Hire purchase. Machine with a cash price of £6,000. Deposit £1,200 and 12 payments of £440. Total = 1,200 + (12 x 440) = 1,200 + 5,280 = £6,480. Extra cost = £480.

Shares. A company with 120,000 shares issues 30,000 at £0.80. Raised = £24,000. New holders own 30,000 / 150,000 = 20%.

Loan interest. £15,000 at 6% a year gives £900 interest a year, or £3,600 over four years (interest on the full amount).

Grant share. A £6,000 grant towards a £30,000 project covers 20%.

Quick self-test

1. State three reasons why a business may need finance.
2. Define working capital.
3. A business has current assets of £18,600 and current liabilities of £21,000. Calculate its working capital.
4. Give one example of a short-term and one of a long-term finance need.
5. State two internal sources of finance.
6. Explain why a sole trader cannot raise money by issuing shares.
7. Give one difference between leasing and hire purchase.
8. A shop hires equipment on hire purchase: deposit £900 and 18 payments of £150. The cash price is £3,000. Calculate the extra cost.
9. Give one advantage and one disadvantage of a bank overdraft.
10. Fifty backers give an average of £80 each through crowdfunding. How much is raised?
11. State two factors that affect the choice of a source of finance.
12. A grant of £7,500 covers 25% of a project. What is the total cost?

Answers

1. Any three of: start-up capital; expansion or growth; replacing non-current assets; investing in new technology; working capital.
2. The money a business has available for everyday expenses (current assets less current liabilities).
3. 18,600 - 21,000 = -£2,400 (negative working capital).
4. Short-term: paying wages and suppliers. Long-term: buying a new building or machine, or expanding.
5. Any two of: owners’ investment; retained profit; sale of unwanted assets; working capital.
6. Only companies have shares to sell. A sole trader’s business is not a company, so there are no shares to issue.
7. With leasing the business never owns the asset. With hire purchase it owns the asset after the final payment.
8. 900 + (18 x 150) = 900 + 2,700 = 3,600. Extra cost = 3,600 - 3,000 = £600.
9. Advantage: flexible, interest only on the amount used. Disadvantage: expensive if used for long, and the bank can ask for it back at short notice.
10. 50 x 80 = £4,000.
11. Any two of: size of business; legal form; amount required; length of time; existing loans; cost; purpose.
12. 7,500 / 0.25 = £30,000.

Where marks are usually lost

• Defining working capital as “cash” or “money in the bank”.
• Giving an overdraft as the answer to a long-term, large-sum need.
• Saying all businesses can issue shares.
• Listing sources without choosing one when asked to recommend.
• Giving a reason with no link to the business in the case (size, legal form, existing loans, purpose).
• Writing “cheap” or “expensive” with no reason, such as interest charged or ownership given up.
• Mixing up leasing and hire purchase.
• Forgetting to subtract current liabilities, or giving a negative result the wrong sign.
• Treating a grant like a loan, or forgetting that a loan must be repaid with interest.

Frequently asked questions

What is the difference between leasing and hire purchase? Leasing is renting an asset with no ownership. With hire purchase the business pays a deposit and instalments and owns the asset at the end, though it pays more than the cash price.

What is the difference between a bank overdraft and a bank loan? An overdraft is a flexible, short-term facility that lets a business spend more than is in its account up to a limit. A loan is a fixed sum repaid with interest over an agreed period, which suits long-term needs.

Is working capital the same as cash? No. Working capital is current assets minus current liabilities, so it includes inventory and trade receivables as well as cash.

Can every business issue shares? No. Only a company can issue shares; a sole trader or partnership cannot raise finance this way.

Official syllabus

These notes 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.