Section 2.1 — Annotated model answers for sources of finance, venture capital, and start-up funding decisions.
These model answers demonstrate how to structure responses for Edexcel International A-Level (IAL) Economics and Business exams. Each answer includes a mark scheme breakdown, PEEL structure (where applicable), annotated paragraphs, and examiner commentary explaining what earns marks at each band.
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8 marks
Unit 2 · 2.1 Raising Finance · Analysis
Analyse: the most appropriate sources of finance for a new start-up business.
Mark Scheme Breakdown
1–2 marksKnowledge of different sources of finance
3–5 marksApplication to a start-up context (limited track record, high risk)
6–8 marksAnalysis of why certain sources are more appropriate than others for a start-up
KKnowledge/Definition
AApplication
AnAnalysis
Model Answer
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
The best answers relate each source specifically to the start-up context rather than discussing sources of finance generically. Explaining why banks are cautious (high failure rate, no track record) demonstrates the analytical depth examiners reward at the top band.
Likely Score7 / 8
4 marks
Unit 2 · 2.1 Raising Finance · Knowledge & Application
Explain: the difference between internal and external sources of finance.
Mark Scheme Breakdown
1–2 marksDefinition of internal sources (from within the business)
3–4 marksDefinition of external sources (from outside) with examples of each
KKnowledge/Definition
AApplication
Model Answer
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.
Likely Score4 / 4
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