O Level Business: Business finance: needs and sources (Cambridge 7115) – Revision Notes

These notes condense section 5.1, Business finance: needs and sources, of the Cambridge O Level Business Studies 7115 syllabus for examination in 2026. For full explanations and a worked recommendation, read the study guide. Then practise with the practice questions. Related pages: the Financial information and decisions practice set, the Cambridge O Level Business hub and the printable checklist. To find weak spots first, use the free diagnostics.

Key definitions

Term	Meaning
Business finance (capital)	Money a business uses to start, run and grow
Start-up capital	Money needed to set a business up before it earns revenue
Capital for expansion	Money to grow an existing business
Working capital	Money for day-to-day running costs
Internal source	Finance from inside the business or its owners
External source	Finance from outside the business
Short-term finance	Money needed or borrowed for a short period
Long-term finance	Money needed or borrowed for several years or more
Overdraft	Spending beyond the bank balance, up to an agreed limit
Debt	Borrowed money repaid, normally with interest
Equity	Money put in by owners or shareholders; not repaid on a set date
Micro-finance	Very small loans, often to people who cannot get bank loans
Crowd-funding	Many people each giving a small amount, usually online

5.1.1 The need for finance

Three main reasons (named in the syllabus):

1. Start-up capital.
2. Capital for expansion.
3. Additional working capital.

Short-term needs are for day-to-day costs and temporary shortages. Long-term needs are for assets and projects that pay back over years. Rule: match the source to the need.

5.1.2 Sources of finance

Internal and external

Internal	External
Retained profit	Bank loan
Owner’s savings or capital	Overdraft
Sale of assets	Trade credit
Reducing stock, collecting debts sooner	Share issue
	Grants, outside investors
	Micro-finance, crowd-funding

Short-term and long-term

Short-term	Long-term
Overdraft	Bank loan (debt)
Trade credit	Share issue (equity)
Collecting debts sooner	Retained profit

Overdraft, debt and equity are the examples the syllabus itself uses. The other items are standard examples.

Quick advantages and disadvantages

Source	Advantage	Disadvantage
Retained profit	No interest; no outsider involved	Only available if profit was made; may be too small
Owner’s savings	Quick; keeps control	Limited amount; personal risk
Sale of assets	Fast cash with no borrowing	Asset lost; one-off
Overdraft	Flexible; interest only on amount used	Often costly; can be withdrawn
Trade credit	Delays payment	Harms supplier relations if overused
Bank loan	Large sum; planned repayments	Interest and security needed
Share issue	No repayment; raises large sums	Owners share control and profit
Micro-finance	Reaches those refused by banks	Small amounts
Crowd-funding	No bank; tests demand	Target may not be met; idea made public

Must-know distinction: debt versus equity

	Debt	Equity
Who provides it	Lender	Owner or shareholder
Repayment	Yes, with interest	No set repayment
Reward	Interest	Dividend, share of profit
Control	Unchanged	May be shared more widely
Effect in a bad year	Interest still due	Dividend can be cut

Why alternative sources matter

• Banks may refuse small, new or risky businesses.
• Micro-finance opens small loans to those without security.
• Crowd-funding raises money from many people and shows whether people want the product.

Short-term versus long-term needs: how to tell

• Ask what the money is for. Paying wages, buying materials or covering a gap before customers pay is a short-term need.
• Ask how long the benefit lasts. A van, oven or new shop earns money for years, so the need is long-term.
• Ask when the money comes back. If the project repays itself within weeks, short-term finance can work. If it repays over years, use long-term finance.
• Remember that one business can have both needs at once. It might use an overdraft for stock and a loan for a new site.

Internal or external: how to tell

• Internal: the money already belongs to the business or its owner, or is released from within, such as profit kept back or an unused asset sold.
• External: someone else provides it and expects something back, such as interest, repayment, a dividend or a reward.
• Careful: an owner’s savings are the owner’s own money, so they are usually treated as internal. A new shareholder’s money is external, because it comes from outside the existing owners.

Choosing a source: the four factors

1. Size and legal form of business: a sole trader cannot issue shares; a company can.
2. Amount required: small sums, overdraft or savings; large sums, loan or shares.
3. Length of time: short need, short-term source; long need, long-term source.
4. Existing loans: heavy borrowing makes more debt harder to get and riskier.

Method in steps: recommend and justify

1. Pull out the amount, purpose, time period and legal form from the case.
2. Name your source (and call it internal or external, short-term or long-term).
3. Give a reason that uses a number or fact from the case.
4. Reject one alternative and say why.
5. Close with a one-line judgement.

Worked reminder

Dalmere Foods, a private company, needs 120 000 dollars to buy ovens that last about ten years. A bank loan over ten years matches the length of the need. An overdraft does not, because it is short-term and can be withdrawn. Selling shares would avoid interest but would share ownership. Judgement: a long-term bank loan, unless existing loans already make repayments hard.

Matching sources to situations

Situation	Sensible choice	Why
New sole trader, small sum, no assets to offer	Owner’s savings, then micro-finance or crowd-funding	Banks may refuse; shares are not available
Seasonal shortage of cash for a few weeks	Overdraft or trade credit	Short need, short-term source
Large company buying a factory	Long-term loan or share issue	Large sum, long period
Business with spare unused vehicle	Sale of assets	Quick cash, no interest
Profitable business with a modest project	Retained profit	Cheap and no outsider involved
Business already heavily in debt	Equity or internal sources	More debt raises repayments and risk

Treat the table as a starting point only. A case study often gives a fact that changes the answer, so always check the amount, time, legal form and existing loans before choosing.

Command words for this topic

• State, identify: a short answer with no explanation.
• Calculate: work out from the figures given, showing each step.
• Outline: set out the main points briefly.
• Define: give a precise meaning, for example an overdraft lets a business spend beyond its bank balance up to an agreed limit.
• Explain: a point, then a reason or consequence, linked with “because” or “so”.
• Consider: review the information given and respond to it, weighing more than one side.
• Justify (with recommend): choose a source and support the choice with evidence from the case, ideally weighing it against an alternative.

Quick self-test

1. Name the three main reasons for needing finance given in the syllabus.
2. Give one internal source and one external source.
3. Is an overdraft short-term or long-term finance?
4. What is the difference between debt and equity?
5. State one advantage of crowd-funding.
6. Why can a sole trader not use a share issue?
7. A business needs 50 000 dollars. It has 20 000 dollars of retained profit available. How much must it find from other sources?
8. In question 7, retained profit supplies what percentage of the 50 000 dollars?
9. Give one reason an existing loan affects the choice of a new source.
10. A business borrows 12 000 dollars at 5% simple interest per year for 2 years. What is the total interest?
11. Give one reason why a business should not use an overdraft to buy a machine that will last ten years.
12. State one disadvantage of using retained profit to fund expansion.

Answers

1. Start-up capital, capital for expansion and additional working capital.
2. For example retained profit (internal) and a bank loan (external).
3. Short-term.
4. Debt is borrowed and repaid with interest; equity is owners’ money with no set repayment.
5. For example it needs no bank, or it shows whether people want the product.
6. A sole trader does not have shares to sell; shares belong to companies.
7. 30 000 dollars.
8. 40%.
9. For example lenders may refuse more, or extra repayments could strain cash flow.
10. 1 200 dollars.
11. An overdraft is short-term and can be withdrawn by the bank, so the repayment period does not match the machine’s life.
12. For example it may be too small, or it may reduce what can be paid to the owners.

Where marks are usually lost

• Calling an overdraft or a trade credit arrangement a long-term source.
• Writing “loan” without saying whether it is short-term or long-term, when asked for a source for a specific need.
• Describing sources with no link to the case, when the command word is recommend or justify.
• Recommending shares for a sole trader.
• Mixing up debt and equity, or calling shareholders lenders.
• Giving a list of advantages with no drawback, so no judgement.
• Forgetting the percentage sign, or working out the wrong base, in a finance calculation.
• Confusing micro-finance with crowd-funding.

Frequently asked questions

What is the difference between debt and equity finance? Debt is borrowed money that must be repaid, usually with interest, and the lender does not become an owner. Equity is money put in by owners, such as share capital, with no set repayment date, and shareholders expect dividends when there is profit.

Are internal sources of finance free? No. Retained profit costs no interest, but it could have been paid to the owners instead, and selling assets means the business loses them.

What is the difference between micro-finance and crowd-funding? Micro-finance is very small loans, often to people who cannot get ordinary bank loans. Crowd-funding raises small amounts from a large number of people, usually through a website, who may receive a product, a reward or a share in return.

Why should an overdraft not be used to buy long-lasting equipment? An overdraft is short-term finance that the bank can ask to be repaid at short notice. A long-term need, such as a machine lasting many years, should be matched with long-term finance.

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.