Sources of Finance (Cambridge International IGCSE Accounting)
Exam board Cambridge International · IGCSEUpdated 2026-02-05
Sources of finance
What are short-term sources of finance?
-
The main sources of short-term finance are:
- bank overdrafts
- trade credit
- short-term loans
Bank overdrafts
- A bank overdraft is where the bank allows a business to use more money than they have available in their bank account
| Advantages | Disadvantages |
|---|---|
| - Interest is only charged when the customer uses their overdraft - The overdraft is flexible and is available when needed - The funds are available immediately | - Interest rates for overdrafts can be high - The business can become reliant on an overdraft - The amount available in the overdraft is not usually high |
Trade credit
- Trade credit is where the business purchases goods and assets but pays at a later date
| Advantages | Disadvantages |
|---|---|
| - This improves working capital as cash is kept in the business for longer - It is quick to arrange - It is usually interest-free if paid on time - It builds relationships with suppliers | - There are penalties and interest for late payment - Late payments can damage relationships with suppliers |
Short-term loans
-
A short-term loan is an amount of money that is borrowed by a business from a lender or bank and repaid within a year
- These are also known as working capital loans
| Advantages | Disadvantages |
|---|---|
| - These give quick access to cash - Improves working capital - Able to budget the repayments as they are regular, fixed amounts | - The business has to pay interest on the loan - The amount has to be repaid within a short time frame, such as a year |
What are long-term sources of finance?
-
The main sources of long-term finance are:
- Bank loan
- Leasing
- Hire purchase
- Owner's or partner's capital
- Introducing a new partner
- Issue of shares
- Debentures
Bank loans
- A bank loan is an amount of money that is borrowed by a business from the bank and repaid over several years
| Advantages | Disadvantages |
|---|---|
| - Large amounts of cash are available to borrow - Able to budget the repayments as they are regular, fixed amounts - The owner(s) do not lose control of the business - Spreads the cost of an asset over several years | - The business has to pay interest on the loan - The amount has to be repaid regardless of whether the business makes a profit or loss - The business may be required to offer an asset as security for the loan - There might be penalties for early repayments |
Leasing
-
Leasing is where a business rents an asset from a company
- They do not own the asset
| Advantages | Disadvantages |
|---|---|
| - No large upfront costs - Able to budget the payments as they are regular, fixed amounts - Access to expensive assets which the business might otherwise be unable to afford - Maintenance of the asset is usually included in the lease agreement | - The business does not own the asset - It can cost more to lease an asset than to buy |
Hire purchase
-
A hire purchase is where a business pays a deposit for an asset and then pays the rest of the value in instalments
- They do not own the asset until it is fully paid off
| Advantages | Disadvantages |
|---|---|
| - It spreads the cost of the asset over several years - The business owns the asset at the end of the hire purchase - Able to budget the payments as they are regular, fixed amounts | - It is more expensive than buying the asset outright - Instalments must be repaid regardless of the position of the business - A deposit is required - The asset can be repossessed if payments are missed |
Owner's or partner's capital
-
The owner or a partner can introduce more of their own money as capital to the business
- This is only available to sole traders and partnerships
| Advantages | Disadvantages |
|---|---|
| - The business does not need to pay interest - The business does not need to repay the amount - Avoids borrowing from external parties | - The owner or partner can lose the money if the business goes bust - The owner or partner might not have large sums of money available to invest |
Introducing a new partner
-
A new partner can be introduced with their capital
- A partnership can introduce a new partner
- Or a sole trader can form a partnership
| Advantages | Disadvantages |
|---|---|
| - The business does not need to pay interest - The business does not need to repay the amount - Avoids borrowing from external parties - New skills are introduced to the business | - Profits are shared - Control of the business is diluted - There is potential for conflict between the partners - It feels more permanent as it is difficult to remove a partner |
Issue of shares
- A limited company can issue shares to raise funds
| Advantages | Disadvantages |
|---|---|
| - Large amounts can be raised - The business does not need to pay interest - The business does not need to repay the amount - Avoids borrowing from external parties | - Control of the business might be diluted - It can be expensive to sell shares - Dividends might have to be paid |
Debentures
-
A limited company can issue debentures to investors upon the loan of money
- The amount is paid in full at an agreed date in the future
- Interest is added to the amount owed each year
| Advantages | Disadvantages |
|---|---|
| - Large amounts can be raised - There is no loss of control - Interest can be budgeted as it is predictable | - Interest must be paid regardless of profits - The amount must be repaid in the future - Security might be required |
Exam Hint This topic isn't explicitly on the specification. However, there have been multiple questions on past papers where students have been asked to evaluate the use of different sources of finance.
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