What are the main sources of finance for a start-up?

Key sources include: personal savings (no interest or loss of ownership), bank loans (larger sums but require collateral and fixed repayments), venture capital/angel investors (substantial funding plus expertise but require equity stake), crowdfunding (raises awareness but uncertain outcome), and government grants (free money but competitive and restrictive).

Why might banks be reluctant to lend to start-ups?

Start-ups have no trading history to demonstrate profitability, a high failure rate (around 60% fail within three years), limited collateral to secure the loan, and uncertain cash flows making repayment risky. Banks prefer lending to established businesses with proven revenue streams and valuable assets.

Discuss the most appropriate sources of finance for a new start-up business.

A start-up business typically has limited trading history , no proven revenue stream, and higher risk — all of which restrict its financing options. K Personal savings are often the most accessible source because they do not require approval from a third party and involve no interest payments or loss of ownership . A However, the amount available is limited by the entrepreneur's personal wealth, which may be insufficient to cover start-up costs such as premises, equipment, and initial stock. An Bank loans provide a larger lump sum, but banks may be reluctant to lend to start-ups due to the high failure rate — approximately 60% of UK start-ups fail within the first three years. A If approved, the entrepreneur must provide collateral (personal assets as security) and make fixed monthly repayments regardless of whether the business is generating revenue, creating cash flow pressure in the early months. An Venture capital or angel investment offers substantial funding and often includes business expertise and mentoring . A However, investors typically demand an equity stake , meaning the entrepreneur loses a share of ownership and future profits. This trade-off may be worthwhile if the investor's contacts and experience significantly increase the business's chances of survival. An

Explain the difference between internal and external sources of finance.

Internal sources of finance come from within the business — they do not require borrowing or selling shares. K Examples include retained profit (reinvesting earnings), sale of assets (selling unused equipment), and reducing working capital (running down stock levels). A External sources come from outside the business and involve either borrowing or giving up equity. K Examples include bank loans (fixed repayment schedule with interest), share capital (selling ownership stakes), and venture capital (investment from specialist firms in exchange for equity). A Internal finance avoids interest payments and loss of control, but may be limited in amount. External finance provides larger sums but comes with obligations.

WBS12 8-mark discuss question: Planning a Business and Raising Finance model answers | Edexcel IAL Business

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Business · WBS12 · Unit 2 · 2.3.1

Exam questions

Every question here carries a tariff that exists in IAL Business. Open the mark scheme before the model answer and you will see what the examiner is paid to look for.

Discuss8 marksAO1 · AO2 · AO3 · AO412 min
Discuss the most appropriate sources of finance for a new start-up business.
Mark scheme
Discuss (8)
Appendix 6: Requires a logical chains of reasoning, in context, showing cause(s) and/or effect(s). A brief assessment is required showing an awareness of competing arguments/factors.
Level 1 — 1–2 marks
Isolated knowledge. Not set in the context of the business and no chain of reasoning.
Level 2 — 3–4 marks
Knowledge used in the context of the business. A cause is identified but the chain is not carried through to an effect.
Level 3 — 5–6 marks
A logical chain of reasoning in context showing cause and effect. No awareness of competing arguments or factors.
Level 4 — 7–8 marks
A logical chain of reasoning in context showing cause(s) and effect(s) AND a brief assessment showing awareness of competing arguments or factors — the clause that separates Discuss from Analyse.
Indicative content
Knowledge of different sources of finance. Application to a start-up context (limited track record, high risk). Analysis of why certain sources are more appropriate than others for a start-up.
Model answer — 7–8 / 8
What the marks in the margin meanKKnowledge/DefinitionAApplicationAnAnalysis
A start-up business typically has limited trading history, no proven revenue stream, and higher risk — all of which restrict its financing options. K

Personal savings are often the most accessible source because they do not require approval from a third party and involve no interest payments or loss of ownership. A However, the amount available is limited by the entrepreneur's personal wealth, which may be insufficient to cover start-up costs such as premises, equipment, and initial stock. An

Bank loans provide a larger lump sum, but banks may be reluctant to lend to start-ups due to the high failure rate — approximately 60% of UK start-ups fail within the first three years. A If approved, the entrepreneur must provide collateral (personal assets as security) and make fixed monthly repayments regardless of whether the business is generating revenue, creating cash flow pressure in the early months. An

Venture capital or angel investment offers substantial funding and often includes business expertise and mentoring. A However, investors typically demand an equity stake, meaning the entrepreneur loses a share of ownership and future profits. This trade-off may be worthwhile if the investor's contacts and experience significantly increase the business's chances of survival. An
Examiner commentary
Three sources, each developed in the start-up context rather than described generically, with the failure rate explaining why banks are cautious. Level 4 is earned because each source is weighed rather than presented: savings against the limit of personal wealth, a loan against fixed repayments that start before revenue does, venture capital against the equity given up — and that last trade-off is judged, not merely stated. That is the brief assessment Discuss asks for.
Explain4 marksAO1 · AO26 min
Explain the difference between internal and external sources of finance.
Mark scheme
1–2 marks
Definition of internal sources (from within the business)
3–4 marks
Definition of external sources (from outside) with examples of each
Model answer — 4 / 4
What the marks in the margin meanKKnowledge/DefinitionAApplication
Internal sources of finance come from within the business — they do not require borrowing or selling shares. K Examples include retained profit (reinvesting earnings), sale of assets (selling unused equipment), and reducing working capital (running down stock levels). A

External sources come from outside the business and involve either borrowing or giving up equity. K Examples include bank loans (fixed repayment schedule with interest), share capital (selling ownership stakes), and venture capital (investment from specialist firms in exchange for equity). A Internal finance avoids interest payments and loss of control, but may be limited in amount. External finance provides larger sums but comes with obligations.
Examiner commentary
Clear distinction with named examples for each. Correctly identifies the trade-off (no interest vs limited amount). Avoid listing sources without categorising them — the question asks for the difference.

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Planning a Business and Raising Finance — Exam Questions & Model Answers

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