Choose a suitable source of finance
Recommend a finance source using business size, legal form, amount, duration, existing borrowing, cost and purpose.
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which factor is relevant when choosing a source of finance?
What you will learn
- Apply source-selection factors
- Compare alternatives with case evidence
- Justify a conditional recommendation
Use the business's circumstances
The syllabus factors include business size, legal form, amount required, length of time, existing loans, cost and purpose. A small sole trader may not be able to issue shares, while an incorporated company may consider share capital under the relevant rules.
A modest short-term need can differ from a large long-term investment. Existing borrowing affects capacity and lender risk; the business should consider total repayments and any security or ownership conditions.
Justify and qualify
A recommendation identifies the most relevant case facts, explains how the source fits the purpose and compares at least one alternative. It can state what information is still needed, such as an interest rate, sales forecast or grant decision.
No source is best in every case. A cheaper source may be unavailable, too slow, too restrictive or poorly matched to the asset's useful life.
Pause and explain
What makes a finance recommendation stronger?
Worked example
A sole trader needs $5,000 for seasonal stock that will be sold within three months. A bank offers a small overdraft, and a supplier offers 30-day trade credit. Recommend what to compare.
Show the worked solution
- The need is short-term and linked to inventory.
- Trade credit may align payment with stock turnover; an overdraft may offer more flexibility.
- Check total cost, supplier terms, sales timing and repayment capacity.
Answer The trader should compare supplier trade credit with a limited overdraft. Trade credit may align payment with selling the stock, while an overdraft may offer flexibility; the choice depends on prices, fees, due dates, supplier reliability and expected receipts.
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 private limited company needs $250,000 for a new production line expected to operate for eight years. It already has a bank loan. Recommend two sources to compare and explain the deciding evidence.
Give me a hint
Match the large, long-term investment to sources with suitable capacity and terms.
Compare my reasoning
- Compare a further long-term loan with issuing shares or leasing the line.
- Check existing debt, interest, repayment cover and ownership effects.
- Compare asset life, total payments and forecast cash generated.
The company could compare a long-term loan with share capital or leasing. A loan may preserve ownership but add repayments to existing debt; shares may reduce repayment pressure but dilute ownership. The decision needs borrowing capacity, total cost, control preferences and forecast cash from the production line.
Look for these in your work
- Two relevant sources
- Trade-off linked to current loan
- Evidence needed identified
A sole trader needs a small sum for a one-month cash gap while an invoice is overdue. Compare an overdraft with selling a productive asset.
Give me a hint
The need is temporary; compare flexibility and the cost of losing an asset.
Compare my reasoning
- An overdraft can bridge timing but carries fees and repayment conditions.
- Selling an asset releases cash but may reduce future capacity.
- Check invoice timing and alternative collection actions.
A small overdraft may fit a temporary cash gap if the invoice is likely to be paid and the fees are acceptable. Selling a productive asset could cause lasting capacity loss for a short-lived problem; the trader should also seek payment promptly and confirm the invoice's reliability.
Look for these in your work
- Duration matched
- Asset trade-off included
- Receipt uncertainty checked
A business must choose between a lower-cost grant with an uncertain decision date and a loan it can access now. What should it compare before deciding?
Give me a hint
Consider project timing, grant conditions and the full loan obligation.
Compare my reasoning
- Check whether waiting would delay or lose the project opportunity.
- Confirm grant eligibility, permitted costs and award timing.
- Calculate loan fees, interest, repayments and affordability.
The business should compare project urgency with the grant's eligibility and uncertain decision date, then weigh those against the loan's full cost and repayment capacity. If the project can wait, the grant may be attractive; if delay is costly, accessible finance may fit better, subject to affordability.
Look for these in your work
- Timing addressed
- Grant conditions checked
- Loan cost and affordability checked
Common mistakes
- Naming a source without explaining its fit
- Ignoring business legal form
- Treating a recommendation as certain when key terms are unknown
What can you explain now?
Which factor is relevant when choosing a source of finance?
Compare with the explanation
Length of time the funds are needed
Duration should fit the purpose and repayment period.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Name four case facts that should influence a finance recommendation.
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.