O Level Business: Business finance: needs and sources (Cambridge 7115) – 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 practise section 5.1, Business finance: needs and sources, of the Cambridge O Level Business Studies 7115 syllabus for examination in 2026. They cover the need for finance, internal and external sources, short-term and long-term sources, alternative sources, the factors in choosing, and recommending and justifying. Learn the ideas first in the study guide and the revision notes. See also the Financial information and decisions practice set, the Cambridge O Level Business hub and the printable checklist. All businesses and figures are invented.

Questions

1. State two reasons why a business may need finance. [2]

2. Explain the difference between a short-term finance need and a long-term finance need. Give an example of each. [4]

3. For each of the following, state whether it is an internal or an external source of finance: retained profit; a bank loan; the sale of an unused delivery van; crowd-funding. [4]

4. Define the term overdraft and explain why it is suited to a short-term need. [3]

5. A bakery borrows 30 000 dollars from a bank. The interest is 7% a year, calculated as simple interest on the original sum, and the loan is repaid in equal monthly payments over 4 years. (a) Calculate the total interest paid. [2] (b) Calculate the monthly payment. [2]

6. Explain two differences between debt and equity as long-term sources of finance. [4]

7. Explain why micro-finance and crowd-funding are important alternative sources of capital. [4]

8. Explain two factors a business should consider when choosing a source of finance. [4]

9. Teviot Looms is a sole trader run by Haroon. He wants to buy two new looms costing 18 000 dollars in total. They will last about 8 years. He has 4 500 dollars of savings and 3 000 dollars of retained profit that he can use. Sales are rising and he has no existing loans. (a) Calculate how much he must find from external sources. [1] (b) Recommend a source of finance for this amount and justify your choice. [7]

10. Brenmore Dairy is a public limited company. It plans a new processing plant costing 3 200 000 dollars that will last 15 years. It has 400 000 dollars of retained profit available and already has large bank loans, so its bank is cautious about lending more. (a) Identify one factor from the case that affects the choice of finance. [1] (b) Recommend how the business should raise the money and justify your choice. [7]

11. Lowri’s Bakery needs 60 000 dollars to start. The owner will put in 18 000 dollars of savings and raise 12 000 dollars by crowd-funding. The rest will be a bank loan. (a) Calculate the size of the bank loan. [1] (b) Work out what percentage of the 60 000 dollars is provided by external sources. [2] (c) Explain one risk to the bakery of this mix of finance. [3]

12. A small shop has a temporary cash shortage of 5 000 dollars for about three months while it waits for customers to pay. The bank offers an overdraft at 12% a year. Consider whether the overdraft is a suitable way to cover the shortage, and justify your conclusion. [6]

Answers

1. Any two of: to start the business (start-up capital) [1]; to expand the business [1]; to provide additional working capital for day-to-day costs. Award one mark for each of two.

Examiner insight: Answers gain credit when they name distinct reasons. Two wordings of the same reason, such as “to begin” and “to set up”, are usually treated as one.

2. A short-term need is for a short period, such as paying wages or suppliers while waiting for customers to pay [1]. Example: a cash shortage of a few weeks [1]. A long-term need lasts several years, because the money buys something that earns for a long time [1]. Example: buying machinery or opening a new shop [1].

Examiner insight: An example alone does not show the difference. Mention the length of time in each part so the contrast is clear.

3. Retained profit: internal [1]. Bank loan: external [1]. Sale of an unused delivery van: internal [1]. Crowd-funding: external [1].

Examiner insight: Learn the test: internal means the money comes from within the business or its owners. The van is an asset the business already owns, so selling it is internal even though a buyer pays for it.

4. An overdraft lets a business draw out more than its bank balance holds, up to a limit agreed with the bank [1]. It suits a short-term need because it can be used when needed and interest is charged only on the amount borrowed [1], so the business pays for it only while the shortage lasts [1].

Examiner insight: A definition earns credit when it says what an overdraft actually allows. Saying it is “a type of loan” is too vague on its own.

5. (a) Interest per year = 30 000 × 7% = 2 100 [1]. Over 4 years = 2 100 × 4 = 8 400 dollars [1]. (b) Total repaid = 30 000 + 8 400 = 38 400 [1]. Monthly payment = 38 400 ÷ 48 = 800 dollars [1].

Examiner insight: Show each step. Dividing by 4 instead of 48 gives a yearly figure, so check the period asked for and include the unit.

6. Repayment: debt must be repaid, normally with interest [1], whereas equity has no set repayment date [1]. Ownership: lenders do not become owners [1], whereas shareholders own part of the business and share control [1]. A valid third difference is reward: interest on debt whatever the profit, dividends on equity only if profit is made. Award marks for any two differences.

Examiner insight: Each difference needs both sides. Writing only about debt, with nothing on equity, does not show a difference.

7. Micro-finance gives very small loans to people who cannot get bank loans, for example because they have no security [1]. This lets small entrepreneurs start or expand a business they could not otherwise fund [1]. Crowd-funding raises small amounts from many people, often online [1]. It needs no bank and can show whether people want the product before it is made [1].

Examiner insight: Importance answers need a reason why the source matters, usually that banks may not lend. A description of how the source works is not enough alone.

8. Size and legal form: a sole trader cannot issue shares [1], so must use savings, loans or retained profit [1]. Length of time: the source should match the length of the need [1], so a long-term need should not rely on an overdraft that can be withdrawn [1]. Other valid pairs: amount required (a large sum may need a loan or share issue, as savings are too small) and existing loans (lenders may refuse, and repayments strain cash). Award marks for any two factors, each named and explained.

Examiner insight: Naming a factor earns little by itself. The mark comes from showing what the factor means for the choice.

9. (a) 18 000 − 4 500 − 3 000 = 10 500 dollars [1]. (b) Recommend a long-term bank loan of about 10 500 dollars, alongside his own savings and retained profit [1]. The looms last about 8 years, so the need is long-term and a long-term source matches it [1]. An overdraft would be wrong because it is short-term and can be withdrawn [1]. As a sole trader he cannot issue shares, so equity from new shareholders is not available [1]. He has no existing loans, so a bank is more likely to lend and repayments can come from rising sales [1]. Using his own money first keeps the borrowing down to about 58% of the cost [1]. A drawback is that interest must be paid even if sales fall, but crowd-funding is less certain, so the loan remains the better choice [1].

Examiner insight: Strong answers tie each reason to a case fact: 8 years, sole trader, no existing loans. Generic advantages of loans gain little.

10. (a) Any one of: the bank is cautious because of large existing loans [1]; it is a public limited company, so it can sell shares to the public; the plant lasts 15 years, a long-term need. (b) Recommend using the 400 000 dollars of retained profit [1], a share issue for about 2 000 000 dollars [1], and a smaller long-term loan of about 800 000 dollars [1]. A public company can sell shares to the public, so equity is available and has no repayment [1]. Existing loans make the bank cautious, so relying mainly on more debt would raise risk and repayments [1]. The 15-year life means long-term sources are needed rather than an overdraft [1]. A drawback is that new shareholders share ownership and dividends, but this is outweighed by the lower repayment burden, so the mix is justified [1].

Examiner insight: A recommendation that splits the amount, and says why, shows more judgement than naming one source. Check that the sums add to the total needed.

11. (a) 60 000 − 18 000 − 12 000 = 30 000 dollars [1]. (b) External = 12 000 + 30 000 = 42 000 [1]. 42 000 ÷ 60 000 × 100 = 70% [1]. (c) One risk, explained: the bank loan must be repaid with interest [1] whatever the sales are [1], so a slow start could leave the bakery short of cash for repayments [1]. Another valid risk is that the crowd-funding target is not met, leaving a gap of 12 000 dollars.

Examiner insight: Decide which items are external before adding. Savings are the owner’s own money, so they are not part of the external total.

12. Points in favour: it is short-term finance matching a need of about three months [1]; it is flexible, and interest is charged only on the amount used and for the time used [1]. The cost is small: 5 000 × 12% × 3 ÷ 12 = 150 dollars [1]. Points against: the bank can withdraw an overdraft, which could leave the shop short of cash [1]; if customers pay late, the overdraft may last longer and cost more [1]. Judgement: the overdraft is suitable because the need is short and the cost is low, provided the shop checks that customers will pay on time [1].

Examiner insight: A justified conclusion is stronger when it admits the risk on the other side and still gives a clear decision with a reason. Advantages alone, ending in “so it is good”, read as one-sided.

Where marks are usually lost

• Describing sources without saying whether they are internal or external, or short-term or long-term, when asked.
• Giving an example in place of an explanation of the difference between short-term and long-term needs.
• Treating an overdraft as a way to pay for an asset that lasts many years.
• Describing debt and equity in separate paragraphs without saying how they differ.
• Recommending a source that the legal form rules out, such as shares for a sole trader.
• Ignoring figures in the case when asked to recommend and justify.
• Counting the owner’s own savings as external finance in a calculation.
• Stopping at advantages and drawbacks in a “consider” or “justify” answer without a final conclusion.

Frequently asked questions

Are these Cambridge O Level Business Studies 7115 past paper questions? No. They are original practice questions written for Marlbridge on section 5.1, Business finance: needs and sources. Use them alongside the official past papers.

How do you check a loan repayment calculation? Show each step and check the period the question asks for. Dividing the total by the number of years instead of the number of months gives a yearly figure, not a monthly one, so include the unit.

Should the owner’s savings count as external finance? No. Savings are the owner’s own money, so they are an internal source. Decide which items are external before adding them in a calculation.

How do you write a strong “recommend and justify” answer on sources of finance? Tie each reason to a fact from the case, such as how long the asset will last, the legal form and existing loans. Splitting the amount between sources, and saying why, shows more judgement than naming one source.

What does a “consider” or “justify” answer need at the end? A clear decision with a reason that admits the risk on the other side. Stopping at advantages and drawbacks without a final conclusion loses marks.

Next steps

• Re-read the study guide and the revision notes.
• Check your coverage on the printable checklist and the course hub.
• Take the free diagnostics to find other weak topics.
• For help with finance questions, book a free trial class.

Official syllabus

Cambridge O Level Business Studies 7115 syllabus for examination in 2026, published by Cambridge University Press & Assessment (Cambridge International Education), section 5.1 Business finance: needs and sources.