Select a suitable source of finance
Make a justified finance recommendation by applying source features to amount, duration, ownership, cash flow and risk.
Section 5.2 · Sources of finance
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 5.2.4. Cambridge states that both current versions have no significant changes affecting teaching. This lesson maps only its named section; other sections and full paper practice remain separate. Written practice is self-checked
Before you begin
- No previous business course is assumed. Use the lesson's definitions before applying them to the business context.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What makes a finance recommendation justified?
What you will learn
- Apply finance options to a business context
- Justify a recommendation with relevant conditions
- Compare a preferred source with an alternative
Selection applies criteria to the case
Start with the amount, purpose and duration of the need, then identify available sources consistent with ownership. Compare cost, repayment, flexibility, security, control, risk and whether the source can provide funds in time.
A justified recommendation uses facts about the business. For example, a seasonal cash gap with uncertain size may fit a flexible short-term facility if the business can repay it, while equipment with predictable long-term use may fit asset finance if its total terms are acceptable.
Explain what would change the recommendation
State the main benefit and drawback of the chosen source, then compare at least one alternative. A recommendation should say what evidence or condition matters most, such as lender approval, a reliable forecast, security availability or owner consent.
Finance availability is not guaranteed. A source may be unsuitable if its cost, conditions or risk are not acceptable. Avoid assuming that the same method suits every business or that a recommendation itself guarantees success.
Pause and explain
A sole trader needs short-term seasonal finance and has predictable customer receipts next month. What should a recommendation do?
Worked example
A profitable private company needs $120,000 for a machine expected to last six years. The owners want to retain control but have limited cash. Recommend a source to investigate and a key alternative.
Show the worked solution
- The asset has a long useful life, so compare medium- or long-term funding.
- Owners want to avoid equity dilution.
- Consider secured borrowing or asset finance, and compare lease terms and repayment affordability.
Answer The company could investigate a term loan or hire purchase because the machine has a six-year use and the owners want to retain share control. It must check total financing cost, security, repayments and cash-flow forecasts. Leasing is an alternative if preserving initial cash is more important, but the firm should compare total payments and ownership terms.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A start-up needs $20,000 for inventory for a four-month launch. It has no retained earnings and owners want to keep voting control. Recommend a source to investigate and one condition.
Give me a hint
Match a short-term inventory need with ownership and repayment constraints.
Compare my reasoning
- Retained earnings are unavailable because the firm has no accumulated profit.
- Supplier trade credit or a short facility could match a temporary need.
- Check provider terms, stock turnover and cash to repay.
It could investigate trade credit or a short-term facility, since the need is temporary and the owners want to retain voting control. It must check supplier or lender terms and whether sales collections will arrive before the payment falls due; approval is not guaranteed.
Look for these in your work
- Need and duration are used
- Ownership constraint is considered
- Repayment condition is explicit
A company has stable cash flow and wants to raise $500,000 for growth while limiting new debt. Compare retained earnings with venture capital.
Give me a hint
Compare internal availability and ownership, not just repayment.
Compare my reasoning
- Retained earnings avoid external claims but may be insufficient or needed elsewhere.
- Venture capital can provide external equity for growth.
- Investor ownership, influence and expected returns must be considered.
Retained earnings preserve ownership but may not cover $500,000 and have an opportunity cost. Venture capital can add substantial equity without scheduled loan repayments, but investors may take a share and influence decisions. The company should compare growth needs, investor terms and funds available internally.
Look for these in your work
- Both sources are compared
- Control implications are explicit
- Availability and opportunity cost are included
A farm needs equipment before harvest but has uncertain yields. Explain how you would choose between hire purchase and a bank loan.
Give me a hint
Relate repayments and ownership to the timing and uncertainty of harvest receipts.
Compare my reasoning
- Forecast expected and downside cash receipts.
- Compare loan security and interest with hire-purchase instalments and ownership terms.
- Check whether the business can meet payments if yields are low.
The farm should compare total costs and ownership terms and test repayments against both expected and low-yield cash-flow scenarios. Hire purchase may tie financing to the asset; a bank loan may provide different flexibility or security requirements. The choice depends on actual terms and repayment resilience, not the expected harvest alone.
Look for these in your work
- Uncertainty is reflected
- Sources are compared on terms
- A downside scenario is used
Common mistakes
- Naming a source without applying it to the case
- Giving a recommendation with no drawback or alternative
- Assuming finance approval or future returns are certain
What can you explain now?
What makes a finance recommendation justified?
Compare with the explanation
It applies the source's features to the business's need and constraints
A good choice links evidence, conditions and trade-offs.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do you turn a finance comparison into a justified recommendation with a condition and a credible alternative?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.